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FREE TRADE, THE TARIFF 
AND RECIPROCITY 



BOOKS BY THE SAME AUTHOR 

Principles of Economics, Second edition, 1915 

Inventors and Moneymakers, 1915 

The Tariff History of the United States, 
Sixth edition, 1914 

Some Aspects of the Tariff Question, Second 
edition, 1917 

The Silver Situation in the United States, 
Third edition, 1898 

Wages and Capital, 1896 



FREE TRADE, THE TARIFF 
AND RECIPROCITY 



BY 

F. W. TAUSSIG, Ph.D., Litt.D. 

Henry Lee Professor of Economics in Harvard University; 

Sometime Chairman of the United States 

Tariff Commission 



U3eto g*orfe 

THE MACMILLAN COMPANY 

1920 
All rights reserved 

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COPYEIGHT, 1920 

BT THE MACMILLAN COMPANY 



Set up and eleotrotyped. Published, January* 1920 



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PREFACE 

The papers gathered in this volume have been published at 
intervals over a considerable period, and have been addressed 
to different audiences. Nevertheless they have a unity of 
purpose and plan which will serve, I trust, to justify their 
appearance in the present form. They cover the arguments 
commonly heard in the tariff controversy and more especially 
those urged in the course of recent debates in the United 
States. Most of them are addressed to the general public, 
and assume on the reader's part no special training in eco- 
nomics. All have now been revised with a view to con- 
nected and consistent presentation. 

One topic of importance and of general interest is touched 
but briefly — the doctrine of protection to young indus- 
tries. I have considered this topic in another book, " Some 
Aspects of the Tariff Question/' with so much detail that it 
could here not be taken up otherwise than summarily without 
repeating in so many words what had already been said. 
The reader who may be interested is referred to the earlier 
book, in which are given the results of detailed investiga- 
tions bearing on several questions of principle, among them 
the validity of the argument for protection to young indus- 
tries. With this exception the present volume may be fairly 
said to cover, if not the whole of the tariff controversy, those 
phases of it which now are chiefly under discussion in the 
United States. 






CONTENTS 



PAGE 

I The Present Position of the Doctrine of Free 

Trade 1 

The doctrine of free trade apparently triumphant in 1870. — 
Subsequent reaction. — Tenacious hold of ancient fallacies. 
— Protection and wages. — Dumping. — Agricultural compe- 
tition and political problems. — Protection to young in- 
dustries. — The causes of economic progress. — England, 
Germany, the United States. — Intensification of national 
feeling. — Attitude of economists. — Conclusion. 



II Abraham Lincoln on the Tariff : a Myth . . 34 

" Keeping the goods and the money " : a myth. — A sequel. — 
Epilog. 



Ill How the Tariff Affects Wages 48 

Widespread belief in the United States that the tariff raises 
wages. — Familiar facts inconsistent with the belief. — The 
volume and variety of our exports. — Great Britain not under- 
sold by British India. — Trade relations between Great Britain 
and Germany. — Does the Tariff, though not the cause of high 
wages, serve to keep them up ? — It does in those competitive 
industries in which effectiveness is not high. — Results to be 
expected from abolition of duties. — Improbability of any 
abrupt change. — Cases of labor monopoly. — Causes of the 
general and dominant productiveness of American industry. — 
" Efficiency " and " effectiveness " in manufacturing indus- 
tries. — Significance of low wages in certain manufacturing 
industries. — Conclusion. 



IV Wages and Prices in Eelation to International 

Trade 70 

Wages and other money incomes, not prices, the important 
thing. — High wages consistent with low prices where there 
is effectiveness of labor. — " Domestic commodities " not neces- 
sarily high in price in countries where money wages are high. 

vii 



viii Contents 

PAGE 

— Illustrations from the United States. — High money wages 
the result of effectiveness of labor in exporting industries. — 
In what sense high prices are advantageous to a country. — 
Low wages in a non-competing group have the same effect as 
would high effectiveness of labor in that group. — Conclusion. 

V How to Promote Foreign Trade 95 

Bitterness of trade rivalry. — Foreign trade enriches a country 
not by bringing in money, but through the exchange of ex- 
ports for imports. — The mechanism of international trade 
and the effects on it of the war. — The fundamental factor for 
promoting exports is the effectiveness of labor and capital. 

— Four devices for promoting export trade, ( 1 ) export 
bounties, (2) special transportation rates for export busi- 
ness, (3) special prices by producers on export sales, (4) con- 
cessions in rates of duty secured from foreign countries. — 
Attitude of the United States in international trade and inter- 
national politics. — The open door. 

VI Reciprocity 120 

Effects of different forms of reciprocity. — Limited remissions 
or reductions of duty. — Hawaiian sugar. — European reci- 
procity arrangements after 1860. — Another method, as in the 
McKinley tariff act of 1890: imposition of special duties.-— - 
Effects in the United States and in foreign countries. — 
Conclusion. 

VII Cost of Production and the Tariff .... 134 

The plan of basing tariff rates on differences in cost of pro- 
duction. — Worthless as a solution of the tariff question. 

— Consistently applied, it means not moderate duties, but 
universal and unlimited protection. — Difference between the 
free-trader's point of view and the protectionist's. — Effective- 
ness of labor in relation to proposed equalization of cost. — 
Cost inquiries nevertheless desirable. — Dependency of manu- 
facturing industries on protection exaggerated. — Dependence 
of universal prosperity on the tariff even more exaggerated. 

VIII An Inquiry on the Costs of Wool and Woolens 149 

Report of the Tariff Board of 1910 on wool and woolens. — 
How costs of wool were calculated. — Conclusions on the 
expediency of a duty on raw wool. — Costs of woolen goods. 

— Light on the compensating system. — The question of 
principle, 



Contents ix 

PAGE 

IX How Tariffs Should not be Made . 163 

" Jokers " in the tariff act of 1909. — Structural steel. — 
Cotton gloves. — Nippers and pliers. — Razors. — Need of im- 
partial investigation. 



X The Proposal for a Tariff Commission . . . 180 

No tariff commission can settle policies. — No scientific solu- 
tion. — A tariff commission nevertheless can do good. — Evils 
of traditional methods. — What kind of commission is desir- 
able. — Advantages and disadvantages of a permanent com- 
mission. — Non-partisan investigation needed in any case. 



XI Tariff Problems After the War . . . . . 194 

Three classes of articles: military, essential, non-essential. — 
(1) Military articles; the choice between tariff duties and 
other methods. — Special situation of the coal tar and dye- 
stuffs industries. — (2) Essential articles; potash as an ex- 
ample. — (3) Non-essential articles; the tariff controversy 
pure and simple. — Various shades of opinion. — What a tariff 
commission can accomplish. 



FREE TRADE, THE TARIFF AND 
RECIPROCITY 



THE PRESENT POSITION OF THE DOCTRINE 
OF FREE TRADE x 

Forty years ago, the doctrine of free trade seemed to be 
triumphant, alike in the judgments of thinkers and in the 
policy of the leading countries. The school of Adam Smith 
and Ricardo had swept the board in Great Britain, and its 
conclusions, as set forth in John Stuart Mill's " Principles," 
were thought to represent the definitive outcome of economic 
inquiry. Among these conclusions, the one least open to 
doubt seemed to be that, between nations as between individ- 
uals, free exchange brought about the best adjustment of the 
forces of production; and international free trade was re- 
garded as the one most potent means of increasing the effi- 
ciency of labor. In legislation, the triumph seemed to be no 
less assured. England, after a series of moves in the direction 
of lower duties, had at last taken the sudden plunge to free 
trade in the dramatic repeal of the corn laws in 1846. Not 
long after, France, by the commercial treaty of 1860 with 
England, had replaced the old regime of rigid protection and 
prohibition by a system of duties so moderate that the free 
trader might feel that his ideal, if not quite attained, yet 
could not be long delayed in complete realization. The treaty 
between France and England was soon followed by others of 

i Presidential Address before the American Economic Association, 
December, 1904. 

1 



2 Free Trade, the Tariff and Reciprocity 

similar import between the various countries of Europe, 
spreading over all the Continent a network of reciprocal 
arrangements that greatly lowered the tariff barriers in the 
civilized world. In the United States a long period, from 
1846 to 1861, had witnessed a marked relaxation of the pro- 
tective system ; and if the Civil War had brought a return to 
high duties, this might be ascribed to the financial exigencies 
of that crisis, and might reasonably be expected before long 
to give way once more to a moderate policy. 

How different since then has been the course of events from 
what was confidently expected by the economists of 1860 ! 
Slowly but steadily the current has been reversed, and coun- 
try after country has joined the protectionist ranks. The 
United States, so far from relaxing the high duties imposed 
during the civil war, has strengthened them and enlarged 
their range, and gradually built up a protective system the 
like of which was not dreamed of in earlier days. France, 
restive under the treaty regime of low duties, finally put an 
end to it in 1881, and then proceeded to build up once more 
a system of high protection. Germany took her decisive step 
in the same direction in 1879, and thereafter proceeded 
steadily to enlarge and elaborate her tariff barriers. Aus- 
tria and Italy followed suit, and Eussia has gone to the ex- 
treme in adopting protection. Even the old strongholds of 
free trade have become difficult to hold. Holland's latest 
tariff, while still disavowing deliberate protection, yet levies 
duties which, if ostensibly for financial yield, are inconsistent 
with a strict adherence to free trade. The leading English 
colonies, Canada and Australia, have ostentatiously aban- 
doned that principle. England herself is in the throes of a 
discussion in which her policy of freedom, supposed to have 
been settled once for all, is attacked with vigor and effect; 
and who shall say what is to be the outcome of that discus- 
sion ? 

Xot less striking is the change in temper among economic 



The Present Position of the Doctrine of Free Trade 3 

thinkers. The whole structure of economic theory is under- 
going revision. Many of the doctrines of Adam Smith and 
Eicardo have no more than an historic interest. It still re- 
mains to be seen, as this larger discussion goes on, just what 
the outcome will be in the reconstruction of economic teach- 
ing as a whole ; but it is clear that, so far as the doctrine of 
free trade is concerned, enthusiasm has been supplanted by 
cautious weighing or open doubt. Half a century ago those 
German and French writers who advocated free trade were 
certain that the future was theirs : protection was the waning 
doctrine, and its advocates were hopelessly reactionary. At 
present, certainly in Germany and more or less in other coun- 
tries, a large school has just the opposite feeling. Free 
trade would seem to be the waning doctrine. Laissez- 
faire and freedom have had their day, and the future belongs 
to the conscious direction of industry at the hands of the state. 
International free trade has no more sanctity or authority 
than any other part of the obsolete system of natural liberty, 
and the advantages or disadvantages of tariff restrictions are 
to be coolly weighed for each country by itself, in the light of 
specific experience. 

In view of this unmistakable change in the general atti- 
tude, even the most convinced free-trader must feel called 
on to reconsider the question, and weigh once more the argu- 

: ments for protection. Some such task I propose for myself : 
not indeed the formidable one of going over the entire subject 
afresh, but that of passing in review some of the arguments 

; most commonly heard, and more especially those of which 
most is heard in our own country. 

First of all, something may be said on those aspects of the 
controversy of which most is heard in popular discussion in 
this country. Here, as it happens, the situation is compara- 

i tively simple ; for there is perhaps a nearer approach to a 
consensus of opinion on current popular arguments regard- 
ing protection than on any other subject in the wide field of 



4 Free Trade, the Tariff and Reciprocity 

economics. As to most of the familiar arguments for protec- 
tion, either all the economists are hopelessly in the wrong, or 
else the protectionist reasoning is hopelessly bad. 

The mercantile view of international trade, exploded 
though it has been time and again, has a singularly tenacious 
hold. Even among the most intelligent writers in financial 
journals the familiar attitude is that of rejoicing in a gain of 
exports, regretting a gain of imports: rejoicing in an inflow 
of specie, bewailing its outflow ; so familiar that probably the 
immense majority of persons who have never ^een syste- 
matically trained in economics take this point of view*as a 
matter of course. Now, in a country whose monetary sys- 
tem is top-heavy, the relation of imports to exports may not 
automatically adjust itself without causing trouble. But the 
difficulty in such case, if there be one, is in the circulating 
medium, and it presents questions of monetary reform, not 
any problem as to the gain or loss from international trade. 
No doubt there are some other problems of real complexity 
in the relation of exports and imports. A country whose ex- 
ports grow rapidly and are readily absorbed by foreign 
countries, may thereby secure its imports on more advan- 
tageous terms. This has probably been the situation of the 
United States, especially during the last thirty years. On 
the other hand, a country which depends on international 
trade for obtaining commodities essential for its economic 
well-being and not procurable at home, must look to its ex- 
ports as the means whereby these essentials shall be secured; 
and such a country must have a watchful eye on the con- 
tinuance and growth of its exports. This has doubtless been 
the situation of England during the last thirty years. But 
these are aspects of the theory of international trade quite 
beyond the ken of those who expound the virtues of protec- 
tion to the general public. Here the exports are not regarded 
as the means of buying the imports : the exports are good in 



The Present Position of the Doctrine of Free Trade 5 

themselves, the imports bad in themselves. We may apply 
to this sort of talk a well-known passage of Adam Smith's : 

" Some of the best English writers upon commerce set out with 
observing that the wealth of a country consists, not in its gold 
and silver only, but in its lands, houses, and consumable goods of 
all sorts. In the course of their reasoning, however, the lands, 
houses, and consumable goods seem to slip out of their memory; 
and the strain of their argument frequently supposes that all 
wealth consists in gold and silver, and that to multiply these 
metals is the great object of national industry and commerce." 

So the every-day writers on foreign trade would admit at 
the outset that its only object is the same as that of all labor 
and trade : to increase the sum of enjoyable commodities, and 
to do so by getting the imports we consume, not by selling 
the exports we get rid of. But as their reasoning proceeds, 
the consumable commodities somehow slip out of their mem- 
ory, and all their talk is of gaining by sales and of losing by 
purchase, of the great glories of swelling exports, and the ill 
omen for domestic industry of growing imports. 

Other ancient fallacies have a no less tenacious hold. We 
hear it proclaimed ad nauseam that protected industries give 
the farmer a home market; as if there were created a new 
and additional market, and not a mere substitute for the 
foreign market. It is part of the same ancient fallacy that 
the farmer's " surplus " is talked of as if it must be so much 
waste unless legislation provides a market for it. We all 
know how Adam Smith, in the days when the theory of in- 
ternational trade was in the making, accepted the notion of 
a surplus ; we all know, too, how easy it was for later writers 
to refute Adam Smith out of his own mouth. Again, we 
are constantly told that a tax on imports acts as a burden on 
foreigners, not on the domestic consumer; though here, as 
in other parts of the controversy, the proposition is more 
often an implied premise than an explicit conclusion. Not 



6 Free Trade, the Tariff and Reciprocity 

least, how incessant is the blatant assumption that all pros- 
perity is due to the protective system, and that disaster must 
ensue from any mitigation of its vigor. With some of these 
arguments, a nice analysis no doubt would bring into view 
conditions under which a measure of plausibility, nay of real 
validity, attaches to them. Thus there are conditions under 
which taxes on commodities are borne in part, occasionally 
even in whole, by the producer and not by the consumer. 
These are exceptional conditions; and they are as likely to 
appear under internal taxes as under customs duties. But 
such exceptions and qualifications, found for every social 
and economic principle by the discriminating thinker, are 
not among the subjects of every-day debate. There we find 
the simplest fundamental principles ignored, and the bald- 1 
est errors repeated. It is inevitable, in the popular discus- 
sion of economic problems, that arguments of the crudest sort 
should come to the fore. But I confess to a sense of humilia- 
tion when our leading statesmen turn to reasoning easy of 
refutation by every youth who has had decent instruction in 1 
elementary economics. 

I do not wish to linger on these commonplaces ; yet, at the I 
risk of being tedious, will turn for a moment to that phase 
of the controversy which for near half a century has been 
most conspicuous in our country — the effect of protection 
on wages. For years and years it has been dinned into the 
ears of the American people that high wages are the result | 
of protection, or at least dependent on protection ; that the J 
maintenance of a high standard of living depends on the bar- 
rier against competing laborers of lower price, and that the 
workingman has a special and peculiar interest in the system 
of high duties. And yet I apprehend that here, too, the 
judgment of the economists would be with virtual unanimity 
the other way. The general range of wages in the United 
States was not created by protection and is not dependent on 
protection. The common talk about the sacredness of pro- 



The Present Position of the Doctrine of Free Trade 7 

tection as a means of uplifting the workingman is mere clap- 
trap. 

No doubt there would be some difference in the way in 
which the economists stated the grounds of this conclusion. 
The theory of wages is one of their debatable fields, and some 
points are still to be settled. But for the purposes of the 
present discussion, these differences would not be material. 
It would be agreed by all hands that the fundamental cause of 
high wages is large productiveness of labor, and that so long 
as such productiveness exists a large reward to workmen will 
follow. The higher range of wages in the United States is 
due to the country's rich natural resources, and to the energy 
and intelligence with which these have been utilized. It 
may be that in certain directions the utilization of its re- 
sources has in some degree been hastened or made more ef- 
fective by protection — of this more hereafter. It may be 
that in other directions this utilization has been retarded and 
lamed by protection. But in either case it is beyond doubt 
that, whether we had had in the past complete free trade or 
the most unqualified protection, production would have been 
more generous in the United States than in European coun- 
tries, and wages higher; and it is no less certain that, which- 
ever system we shall have in the future, we shall retain these 
same advantageous conditions. 

But while the generally higher range of wages in the United 
States has nothing to do with protection, and probably not 
much to do with international free trade either, it does not 
follow that some among our laborers may not be dependent 
on the tariff barriers for their present wages in their present 
occupations. So far as the industries in which they are 
employed are really dependent on protection, the high wages 
paid in these particular cases are also dependent on protec- 
tion. Looking at the dominant and normal conditions of 
industry in this country, we find high money wages and at the 
same time low prices of goods. Labor is efficient and goods 



8 Free Trade, the Tariff and Reciprocity 

are produced abundantly; therefore, though the goods are 
sold at low prices, the gross money yield is large, the money 
returns are high, and high money wages are paid. But in I 
those industries in which labor is less efficient, and goods are j 
not produced in abundance, the gross money yield can not j 
be high unless competing products are kept out or handi- I 
capped. In this sense, and to this extent, the maintenance I 
of high wages in some industries depends on the maintenance | 
of protection. 

To say this is to say that here, as in all cases of vested j 
interests, whether of labor or of capital, serious problems | 
present themselves to the legislator. The protectionists nat- J 
urally exaggerate the extent to which industries are in fact | 
dependent on this system, and indeed go to the absurd ex- | 
treme of maintaining that all successful industry and all high 
wages depend on their panacea. The free-traders belittle it, 1 
and often fail to see that in so doing they minimize also those 
consequences of protection which they think bad. The diver- 1 
sion of labor and capital to less productive channels — the 3 
ill effect which is the essence of the free-trade contention — I 
is precisely in proportion to the range of industries in which 
the maintenance of high wages depends on protection. No 
doubt also the free-traders do not squarely face the difficulties j 
of a transition to their system : the slowness with which capi- 
tal and labor would have to be withdrawn from protected i| 
industries, and the prolonged period of unsettlement which j 
would have to be undergone before final readjustment. 

Before leaving this part of the controversy, I will note 
one other aspect of it • — one that touches our pressing -social 
problems. The industries in which labor is efficient, output 
is large, and wages are high, are by no means solely the agri- 
cultural industries. A great range of manufactures are of 
this sort ; and these are our most characteristic manufactures. 
They are the manufactures employing workmen who are 
alert, intelligent, and what is popularly called high-priced. 



The Present Position of the Doctrine of Free Trade 9 

They are the manufactures in which a larger output per 
unit of labor and capital comes from ingenious machinery, 
effective organization, efficient labor, nicely adjusted product. 
Side by side with these are others of a different type, in 
which the laborer is called on chiefly for the monotonous 
repetition of the simplest manual tasks, and in which even 
an ignorant man, or woman, or even child, can be easily 
taught the task. Here the temptation is inevitably to seek 
for cheap labor. The earth has been scoured to find docile, 
ignorant, pliable labor, which shall do for us our Helot's 
tasks. Inpouring immigrants by the million find work of 
this kind. They get wages which are lifted by the surround- 
ing economic forces somewhat above the level of similar 
wages in Europe, but by no means up to the full American 
range. They are in a class by themselves, cut off in large 
degree from the general influences of the country. Their 
children, indeed, commonly feel these influences. They go 
to the public schools, learn the American standards and ways, 
and struggle with more or less success to rise to a higher 
stratum. But this depletion of the lower ranks is more 
than made good by the increasing arrivals of new shoals of 
immigrants. Thus we have, perhaps not permanently, but as 
a continuing part of our present social system, a vast mass of 
human beings doing for low wages work that is dull, monot- 
onous, and according to our standards ill-paid. 

Now I am by no means disposed to assert that the pro- 
tected industries are identical with the industries employing 
labor of this sort. Not a few of the protected industries call 
for labor of the alert and intelligent kind. Many industries 
which have nothing to do with protection call for the dull, 
weary, unskilled work. Such is the mining of anthracite 
coal, whose peculiar conditions have of late been so con- 
spicuously brought into notice; such is the cotton manufac- 
ture in the South, where during the last twenty years a vein 
of this low-lying human material has been unexpectedly dia- 



1-0 Free Trade, the Tariff and Reciprocity 

covered and exploited. But a good share of the protected 
manufactures are in this class. Large parts of the textile 
manufactures in the Atlantic States belong here, and are in 
marked contrast, — ■ to give one example — to such an in- 
dustry as the shoe manufacture. I cannot but believe that 
by increasing the opportunities for the utilization of labor 
of this sort the protective system has added to our social and 
political difficulties. The safe absorption and remaking of 
these unskilled and uneducated masses is largely a question 
of degree. A certain amount we can make over; too many 
of them would swamp our institutions. No thinking man 
can view without concern the rapid increase in their num- 
bers, or believe that it is for our social or moral advantage 
to add by legislative policy to the range of industries which 
create a demand for them. 

I pass now to more difficult matters: to some phases of 
the controversy concerning which economists are much less 
in accord, and on which something is to be said on both sides. 
And here I will begin with two lines of reasoning that are 
not commonly considered together, but which seem to me to 
involve essentially the same question of principle. One 
of them is the argument against dumping; the other is the 
argument for the protection of agricultural products against 
the competition of new countries. 

" Dumping " I take to mean the disposal of goods in 
foreign countries at less than normal price. It can take 
place, as a long-continued state of things, only where there 
is some diversion of industry from the usual conditions of 
competition. It may be the result of an export bounty, which 
enables goods to be sold in foreign countries at a lower price 
than at home. It may be the result of a monopoly or ef- 
fective combination, which is trying to keep prices within 
a country above the competitive point. Such a combination 
may find that its whole output can not be disposed of at 






The Present Position of the Doctrine of Free Trade 11 



these prices, and may sell the surplus in a free market at 
anything it will fetch — always provided it yields the mini- 
mum of " prime cost " or " direct cost." 

Now, if this sort of thing goes on indefinitely, I confess 
that I am unable to see why it can be thought a source of 
loss to the dumped country; unless, indeed, we throw over 
all our accepted reasoning on international trade and take 
the crude protectionist view in toto. If one country chooses 
to present goods to another for less than cost ; or lets its in- 
dustrial organization get into such condition that a monop- 
oly can levy tribute at home, and is then enabled, or com- 
pelled by its own interests, to present foreign consumers with 
goods for less than cost — why should the second country 
object? Is not the consequence precisely the same, so far 
as that other country is concerned, as if the cost of the goods 
had been lowered by improvement in production or trans- 
portation, or by any method whatever ? Unless there is some- 
thing intrinsically harmful in cheap supply from foreign 
parts, why is this kind of cheap supply to be condemned? 

The answer seems to me to depend on the qualification 
stated above — if this sort of thing goes on indefinitely. 
Suppose it goes on for a considerable time, and yet is sure 
to cease sooner or later. There would then be a displace- 
ment of industry in the dumped country, with its inevitable 
difficulties for labor and capital; and later, when the abnor- 
mal conditions ceased, a return of labor and capital to their 
former occupations, again with all the difficulties of transi- 
tion. It is the temporary character of dumping that gives 
valid ground for trying to check it. 

A striking case of this sort has always seemed to me to 
be that of the European export bounties on sugar, which 
for so long a period caused continental sugar to be dumped 
in Great Britain. These bounties were not established of 
set purpose. They grew unexpectedly, in the leading coun- 
tries, out of a clumsy system of internal taxation. They im- 



12 Free Trade, the Tariff and Reciprocity 

posed heavy burdens on the exchequer, as well as on the 
domestic consumer, in the bounty-giving countries ; and they 
were upheld by a senseless- spirit of international rivalry. 
Repeated attempts to get rid of them by international con- 
ferences showed that the cheap supply to the British con- 
sumer, and the embarrassment of the West Indian planter 
and the British refiner, rested not on the solid basis of per- 
manently improved production, but on the uncertain support 
of troublesome legislation. It might well be argued that 
these conditions would come to end sooner or later. The 
longer the end was postponed, the worse was the dislocation 
of industry and the more difficult the eventual return to a 
settled state of things. No doubt these were not the only 
considerations that in fact led Great Britain, the one great 
dumping-ground, to serve notice that she would impose im- 
port duties equal to the bounties unless the bounties were 
stopped. Perhaps this decisive step would have been taken 
even if it had appeared that the bounties were to continue 
as a permanent factor in the sugar trade. But it is in their 
probably temporary character that the sober economist finds 
justification for the policy that led to their abolition. At 
all events, there is tenable ground for arguing that Great 
Britain, in causing them to be stamped out, acted not only 
in the interest of the much-abused consumers of sugar on 
the Continent, but in the permanent interests of her own 
industrial organization. 

The other familiar case of dumping is that of monopoly. 
Here too it may be maintained with much show of reason 
that the diversion from the normal conditions of industry 
is but temporary. Can any country be persuaded in the 
long run that it is for its advantage to support or aid, by 
protective duties, or by any other method, a monopoly which 
mulcts the domestic consumer and thereby is enabled to 
make presents to the foreigner ? Yet the strength of vested 
interests, the curious conservatism of partisan feeling, per- 



The Present Position of the Doctrine of Free Trade 13 

sistent sophistry about giving employment to labor and turn- 
ing the wheels of industry, may keep the practice going for 
a long period. Any measures that would bring it to an early 
end should be welcome alike for the country that dumps and 
for that into which there is dumping. 2 

I turn now to another phase of this same question. The 
competition of the United States and of other newly opened 
countries has depressed the prices of various articles of food 
in Europe; has restricted, or threatened to restrict, the 
volume of agricultural production; and has caused an in- 
creasing drift of population to manufacturing industries. 
But these conditions, it is maintained, are but temporary. 
The new countries will not remain new. Their population 
grows rapidly, and their fresh lands are fast being absorbed. 
It is to be expected that sooner or later their numbers will be 
increased, and their own food supply increasingly drawn 
on, until they have no food for export. The countries to 
which this food supply had been sent, and whose industries 
had been adjusted on that basis, will find readjustment to 
the old basis inevitable. First a large part of their popula- 
tion is transferred from agricultural to manufacturing in- 
dustries, and then must be transferred back to agriculture 
again. Each process of transition is necessarily slow and 
possibly painful, and the suffering and losses outweigh the 

2 No doubt in weighing the advisability of such measures, it would 
be necessary, and at the same time extremely difficult, to ascertain 
whether the dumped article really was exported at an abnormally low 
price. It is familiar knowledge that the Steel Corporation, for exam- 
ple, is selling some articles for export at less than the domestic price. 
But it is quite possible that the export price, while less than the do- 
mestic price, is not really below the level of normal cost. So much 
the worse, doubtless, for the consumer at home; but this is not s 
matter that concerns the foreigner, who buys the steel at no more 
and no less than a reasonable figure. It seems to be at least doubtful 
whether the foreign sales are in fact likely to be made for any con- 
siderable time at a price below the long-run cost of production. If 
not, the question which presents itself is the ordinary one of protec- 
tion, not the peculiar one of a temporary dislocation of industry. 



14 Free Trade, the Tariff and Reciprocity 

temporary benefit during the comparatively brief period of 
cheaper food supply. Is it not wiser to protect agriculture 
for a while, and keep industry in its even and permanent 
course ? 

Here again the answer turns on the temporary nature of 
the situation. If it were clear that the cheaper food sup- 
plies would cease to be available after ten years, or twenty 
years, there would seem to be good grounds for resisting this 
American invasion. The longer the period over which the 
new conditions are likely to last, and the more uncertain 
their end or the stages by which their end will be reached, 
the weaker is the case for resistance. Now all the indica- 
tions are that the relations between new countries and old 
countries, as they have developed during the last half-cen- 
tury, will endure for a long period — a period not to be 
measured by years or decades, perhaps not by generations. 
Many have been the books and pamphlets published during 
the last twenty years, foretelling that the end was near and 
that the opening of new sources of supply had ceased. Yet 
the building of new railways and the general advance in 
transportation, as well as the discovery of regions not be- 
fore thought available, have accentuated the present situa- 
tion of the modern world, and have postponed to an indefi- 
nite future the predicted reaction. To attempt now to make 
provision for such an indefinite future is at the least very 
doubtful policy. What will be the relation, a century hence, 
between the old countries and the countries now new; what 
will then be the sources of food supply for the civilized world ; 
what will be the process by which the old countries fall back 
again on their own resources — if indeed they do fall back — 
these are questions which the statesmen of the present day had 
best leave to the distant successors who may eventually 
have to deal with them. 

A curious argument, connected with this set of considera- 
tions, has been advanced by one of the most distinguished 



The Present Position of the Doctrine of Free Trade 15 

economists of our time. A revival of the more extreme 
phase of the Malthusian reasoning, it looks to the influence 
of more abundant food supplies on the growth of population 
and the standard of living. Briefly, the reasoning is that 
cheaper food will simply cause an increase of numbers, and 
a lowering of the standard of living. When food thereafter 
becomes dearer, either in occasional seasons of dearth or — 
what is supposed to be probable — as a permanent matter 
in the not distant future, there will be nothing to fall back 
on. The larger population which the temporary period of 
plenty had called out will suffer the more when the condi- 
tions of limited supply return. This is just what Malthus 
maintained a century ago. But it is also just what a cen- 
tury of economic and social history has disproved. J am by 
no means of the opinion that the century's history has dis- 
proved the general Malthusian theorem — the tendency to 
pressure and the need of restraint. But the particular 
corollary as to the inexpediency of cheaper food seems to be 
quite untenable. The causes of restraint or lack of restraint 
in multiplication are much more complex than it assumes. 
Notable among them are the advance of education and in- 
telligence, and the desire and opportunity to rise in the social 
scale, which Malthus himself believed to be the vis medicatrix 
of the community. Where intelligence and ambition are 
present, material well-being has a favorable effect of a cumula- 
tive kind: a fairly high standard of living, once set going, 
tends not only to maintain itself, but to rise. Something 
of a lift must be given before an independent upward move- 
ment can maintain itself. The general rise in the standard 
of living which the leading countries have secured in the 
last half -century, and which has been due largely to cheaper 
supplies of food and materials from the new countries, has 
served to give the needed lift. 

I turn now to that course of reasoning which has long 



16 Free Trade, the Tariff and Reciprocity 

been among the economists most effective in favor of pro- 
tection: the argument for protection to young industries. 
It goes by other names and uses other phrases. It is some- 
times called educating or nurturing protection. In popular 
controversy it takes the form of the contention that protec- 
tion, while it may raise temporarily the prices of the goods 
protected, in the long run lowers them. Throughout, it 
rests on the assumption that a country does not secure with- 
out conscious effort or considerable sacrifice those industries 
which in the long run are most advantageous for it. 

Let us consider first the probable range in the application 
of the principle. It is commonly stated to be applicable to 
manufactured goods only, not to raw materials — including 
under the term " raw materials " most agricultural products. 
Such was the view of List, the German economist, who has 
given the most elaborate and perhaps the most effective state- 
ment of the argument. Indeed it is only from this point of 
view that there is any strong distinction between duties on 
manufactures and those on raw materials. No doubt, some- 
thing may be said, by way of special objection to taxes on 
raw materials, that they accumulate as profits are heaped 
up on them in the successive stages through which the com- 
modity passes before reaching the consumers' hands. But 
this makes only a difference of degree, and perhaps not a 
great difference of degree, between raw materials and most 
manufactures ; whereas, so far as the young industries argu- 
ment goes, there is a difference in kind. Nature has settled 
what sorts of raw materials a country is fitted to produce. 
Xo encouragement from protective duties, for example, can 
so stimulate the growth of forests in the United States as 
to bring us in the end cheaper timber. No such stimulus 
can cause the climate of the country to become better adapted 
for wool growing, or give it the peculiar advantages which 
the interior of Australia has for this form of pastoral indus- 



The Present Position of the Doctrine of Free Trade 17 

try; or make Louisiana as well fitted for growing cane 
sugar as Cuba. 

Nevertheless, it must be admitted that even so far as 
this special argument for protection is concerned, there may 
be sometimes as good reason for duties on raw materials 
as on manufactures. Mining operations usually involve an 
initial stage of experiment and uncertainty, and almost al- 
ways call for a heavy investment of fixed capital. The his- 
tory of the iron industry in the United States and Ger- 
many, suggests at least the possibility that a stage of arti- 
ficial <and expensive stimulus may be followed by an eventual 
attainment of developed and cheapened production. Agri- 
culture seems to present such possibilities in less degree ; pas- 
toral industry still less ; and forestry least of all. 

Unlike most other parts of the controversy between free 
trade and protection, the young industries argument con- 
nects itself with few other questions of economic theory, and 
is to be considered chiefly in the light of specific experience. 
The benefits of imports and exports, the relations of domestic 
and foreign industry, wages, foreign cheap labor, surplus 
products, over-production, dumping — these topics at once 
spread over into the general field of economics. Not only do 
they thus enlarge, but they can be disposed of chiefly by 
that mode of general reasoning from comparatively simple 
premises which still remain the most valuable tool at the 
disposal of the economist. But whether protection to young 
industries will or will not have good effects, is simply a ques- 
tion of probability for the given case. Precisely the op- 
posite result from protection has not infrequently been dis- 
covered or supposed to be discovered. It has been said that 
protection, so far from leading to improvements and eventual 
cheapening, leads to the retention of antiquated and ineffi- 
cient methods of production and so to continued enhance- 
ment of prices. There is good ground for believing that the 



18 Free Trade, the Tariff and Reciprocity 

long continued protective regime in France during the first 
half of the nineteenth century had ill results of this kind. 
One of our ardent free-traders, the late David A. Wells, 
repeatedly maintained that the same consequences had ap- 
peared in the United States. His conclusion may have been 
justified by what happened during the period of abnormal 
industrial conditions that followed the Civil War ; yet I doubt 
whether the experience of the United States as a whole sup- 
ports it. The truth is that either result may ensue. Among 
an active and enterprising people the diversion of industry 
into new channels may lead to progress, improvement, and 
eventual gain; whereas in a timid and stagnant people the 
stimulus of competition from abroad may be necessary to 
rouse them to their best efforts. The problem of protection 
to young industries thus offers an especial field for the in- 
ductive and historical method in its stricter sense — the pa- 
tient investigation of particular cases, and the possible final 
construction of an edifice of truth, by the slow gathering of 
fragments of knowledge. 

For the purpose of aiding legislation in our own day, 
however, investigation of this sort must be confined to mod- 
ern experience — the experience, say, of the nineteenth cen- 
tury. Investigations on earlier periods, on the industrial 
regime of the Middle Ages, the system of Colbert, the early 
protective policy of Great Britain, the paternalism of the 
rulers of Brandenburg and Prussia, will teach us little for 
the problems of the present. The value and interest of 
such investigations are not to be denied. We have dis- 
carded certain notions of the earlier economists as to the 
necessary harmfulness or futility of the conscious direction 
of industry, and know that we have still much to learn about 
the causes of progress in the past. But modern conditions 
differ radically from those preceding the nineteenth century, 
and have changed fundamentally in the last fifty years. 
Technical education has been so improved and diffused as to 



The Present Position of the Doctrine of Free Trade 19 

make immensely easier the adoption anywhere of a new 
process. All the means of communicating knowledge, from 
the printing press to the telegraph, serve to spread rapidly 
information about changes in the arts. Restrictions on the 
sale or export of machinery have disappeared. Capital is 
abundant, and is constantly and eagerly seeking fresh em- 
ployment. The conditions are very different from those that 
had to be faced by the undertaker of the seventeenth and 
eighteenth centuries, even of the first half of the nineteenth. 
Whatever economic history can tell us about his troubles and 
obstacles, it can teach little as to the extent to which his suc- 
cessor in modern times needs the prop of legislative aid in 
new ventures. 

Looking now at modern experience in protection to young 
industries, what result do we find ? The answer, alas, is 
not certain. Sometimes we seem to find a degree of success, 
sometimes of failure. The besetting difficulty of all purely 
inductive inquiry in the doings of man is ever present. We 
can not isolate causes. We can not apply protection to a 
country, and make sure that everything else remains un- 
changed. A protective duty may be followed by an increase 
of domestic production, by a new and independent industry, 
by an eventual benefit to the community in the way of 
cheaper commodities; but the question always will remain 
whether other causes have been at work, and whether the 
same result would not have ensued without the tariff in favor 
of the young industry. 

Contrast the history of Germany and of France. For 
the whole period up to 1860, France had a restrictive regime 
of the greatest severity. Yet I have seen no evidence ad- 
duced that during that period of rapid industrial advance 
in the world at large, any gain was secured by France in 
the way of successfully establishing an industry that was able 
to hold its own without aid. In Germany, on the other hand, 
the trend of opinion among competent observers seems to be 



20 Free Trade, the Tariff and Reciprocity 

that at least during the second third of the century the tariff 
policy of the Zollverein, though much more moderate than 
that of France during the same period, nurtured German 
manufacture to advantage. The establishment of free trade 
within Germany by this beneficent customs union opened 
great possibilities of internal growth, which were more easily 
turned into realities by a period of shelter from foreign, 
especially English, competition. During the last third of 
the nineteenth century, Germany's industrial growth was 
one of the remarkable phenomena of our time; but this 
growth began under the moderate protectionist regime of 
the Zollverein, and, whether or not promoted also by the ac- 
centuated protection that began in 1879, has certainly been 
much affected by other factors also, to some of which I 
shall presently refer. 

In the United States we find similarly conflicting evi- 
dence. Some researches of my own have led me to believe 
that on the whole, the first growth of manufactures in this 
country, in the early years of the nineteenth century, was 
advantageously promoted by restrictions on competing im- 
ports. As we come nearer to the present time, the case in 
favor of protection becomes more and more doubtful. In the 
policy of extreme and all-embracing protection which has 
been gradually built up since the Civil War, it would have 
been surprising indeed if we had not scored a few hits. 
Where you send innumerable shots promiscuously in a given 
direction, some few of them are likely to hit the mark. But 
specific and unbiased inquiry on those points is sadly needed, 
and offers a promising opportunity for scholarly investiga- 
tion. It is obvious that there has been not only an enormous 
growth of manufacturing industry, but a great improvement 
in methods of production and a growing independence of 
foreign competition. How far this gain has been carried to 
the point which proves that the community is now better off 
than it would be if it had depended on foreign supply ; and 



The Present Position of the Doctrine of Free Trade 21 

how far such a gain, further, may have been due to causes 
quite independent of encouragement in the way of protec- 
tion — these are questions which certainly can not be disposed 
of without much painstaking and unbiased inquiry, and for 
which even such inquiry very likely would yield no clear- 
cut answer. 3 

Our conclusions as to the general validity of the argu- 
ment for protection to young industries thus have an uncer- 
tain ring. Yet it must be added that while such protection 
can not be proved useless, there is at least one striking phe- 
nomenon which proves it to be not indispensable. That 
phenomenon is found in our own country. Here we have 
seen, under a regime of the most absolute free trade, the 
gradual and steady growth of manufactures in communities 
that a few decades ago were exclusively agricultural. In 
our Southern states the cotton manufacture has grown and 
prospered in face of the competition of the established in- 
dustry of New England. It found in the South advantages 
of situation, and a labor supply which proved amenable to 
profitable exploitation. But these advantages could not be 
utilized without an initial period of experiment and uncer- 
tainty, and" during this the older industry had all the ad- 
vantages against which protection is supposed to be neces- 
sary. Even more instructive is the transformation of the 
great Central region, — the states north of the Ohio and east 
of the Mississippi. Here we have seen, under a regime 
of complete free trade within the country, the steady growth 
of manufactures. When the field was favorable for a new 
industry, whether from rich natural resources, from advan- 
tage in location, or from ingenuity and enterprise among 
the leaders of industry and the rank and file, there the in- 

3 In my book on " Some Aspects of the Tariff Question" (1916), I 
have given at some length the results of investigations from this point 
of view on the history of the iron industry, the sugar industry, and the 
textile manufactures. 



22 Free Trade, the Tariff and Reciprocity 

dustry has expanded and flourished, unchecked by the com- 
peting establishments of the older states. Some of the in- 
dustries that so sprang up in the Central region have been 
of the kind that felt the stimulus of protection against in- 
ternational competition. Some have been quite independent 
of this stimulus, the question being not whether they would 
spring up within the country, but where within the country — 
whether along the sea-board or in the interior. In either case, 
the full competition of the older regions of our own country 
has been felt by the newer regions. The diversification of 
the newer regions has nevertheless proceeded smoothly and 
steadily. That diversification continues and will continue, 
notwithstanding the most absolute free trade throughout our 
own borders. No artificial fostering as against the manu- 
factures of the East has been possible ; though, if possible, it 
would doubtless have been asked. Yet the growth of manu- 
factures in the Central region has been perhaps the most 
striking change in the industrial structure of the country 
during the last generation. 

These familiar facts must make us hesitate before ascrib- 
ing to legislative interposition too much effect on the develop- 
ment of new industries or on the general course of economic 
progress. I have already referred to the difficulty of disen- 
tangling the complex forces that bear on economic progress, 
and will not pretend to offer anything in the way of proof 
for what I have further to offer as regards the relative 
weight of different factors. Briefly stated, my belief is 
that the general structure and spirit of the social body are 
much more important than specific encouragement to this 
or that industry. Any detailed statement of the grounds 
of this opinion would carry us into fields much more specula- 
tive than those which have been considered in the preceding 
pages; and it must suffice to illustrate rather than support 



The Present Position of the Doctrine of Free Trade 23 

it from a brief consideration of some aspects of social and 
economic history. 

First there is the case of England. Clearly several causes 
contributed to the remarkable economic advance of that coun- 
try during the eighteenth and nineteenth centuries. Her 
insular position preserved her from the wars which devastated 
the Continent. Her indented coast cheapened internal trans- 
portation from an early date. Her great mineral resources 
supplied the foundations of the modern workshop. The pro- 
tective system of older days is supposed to have nurtured 
her industries until they became independent — with how 
great effect, is the debatable question. But most important 
of all has been the atmosphere of freedom, and the clear 
avenue to conspicuous success which has been open to all 
who were capable and strong. Political freedom came first, 
and soon was supplemented by industrial freedom. Hence 
the all-pervading spirit of ambition, resource, enterprise. To 
this spirit a stimulus of incalculable strength has been given 
by the curious development of the British social hierarchy. 
Nowhere has the aristocracy held its place so strongly in the 
esteem of the rest of the community, and nowhere has ad- 
mission to that aristocracy been more free. The rich mer- 
chant, manufacturer, banker, mounts readily on the social 
ladder. Given plenty of riches, a little time, and he or his 
descendants become associates of peers, soon become peers 
themselves. In the eighteenth century Adam Smith, re- 
marking on the differences between England and France, 
mentioned France as a country where trade was in disgrace, 
and England as one where it was highly respected. The ma- 
terialism of the British aristocracy and the snobbishness of 
British society have long been topics for the satirist. But 
materialism and snobbishness have enlisted the strongest of 
social motives, the undying love of distinction, in the direc- 
tion of economic initiative and industrial advance. 



24 Free Trade, the Tariff and Reciprocity 

Factors of the same kind have been powerful in our own 
country. Every career and every degree of success have 
been open to all; open not only under the law, but under 
the mobile conditions of a thoroughly democratic community. 
The most obvious avenue to distinction has been the at- 
tainment of wealth. Large enterprises, whether in trade, 
manufactures, or transportation, have long enlisted the most 
capable intellects of the country. Every opportunity for the 
conduct of business on a large scale has been eagerly scanned 
with keen eyes by the captains of industry. Add to this the 
early development of a high degree of mechanical skill and in- 
genuity, and natural resources which are varied and abundant 
to an unusual degree, and you have conditions under which 
legislative stimulus is at best of secondary importance. The 
evidence seems to me conclusive that the United States under 
any tariff system would have become a country with varied 
industries and with highly developed manufactures. The 
protective duties have only affected the degree and the direc- 
tion of that development. 

Still another factor deserves to be noted. Not only the 
spirit of freedom and enterprise within the community has 
its effect, but that spirit with reference to other communities 
also. The political position of a country and its martial suc- 
cess seemed to have a reflex effect on the industrial success 
of its citizens in time of peace. 

Here the recent development of Germany is opposite. 
Her industrial advance during the generation that followed 
the Franco-German war is one of the striking phenomena of 
our time, and leads naturally to speculation on its causes. 
No doubt, as in all such cases, these causes are varied. The 
thorough organization of popular education and of scientific 
education is one cause. The stimulating effect of free trade 
within the country, as established by the Zollverein since 
1834, is another : though this gain had been enjoyed by France 
throughout the nineteenth century, and by England for 



The Present Position of the Doctrine of Free Trade 25 

centuries before. Much is due to the whole change in the po- 
litical and social atmosphere which came with the crumbling 
of petty absolutism, and which was consummated with the 
foundation of the German Empire. But to all this must be 
added the new spirit which came over the country after the 
war of 18-70-71. Germany emerged from the conflict with 
a new sense of strength and confidence. The feeling com- 
municated itself to the field of peaceful industry. Vigor, 
enterprise, and boldness showed themselves. Large enter- 
prises in new fields were launched and successfully conducted, 
and great captains of industry came to the fore. A spirit of 
conquest in all directions seems to have spread through the 
people, bred or at least nurtured by the military conquest 

Is it fanciful to suppose that consequences of the same sort 
have appeared in other countries also after victorious wars? 
England emerged from the Napoleonic wars with a great 
feeling of pride and power. She alone had never yielded 
to the great conqueror. The period which followed was 
that of her most sure and rapid economic advance. She 
then established the hegemony in the industry of the civilized 
world which she maintained through the nineteenth cen- 
tury. The northern part of the United States felt a similar 
impulse after th(j Civil War. That struggle had been on a 
greater scale than was dreamed of at the outset, and its out- 
come proved the existence of unexpected power and resource. 
Is it an accident that the ensuing years showed a spirit of 
daring in industry, and sudden and successful activity in 
commercial enterprises ? 

No one is more opposed than I am to all that goes with 
war and militarism. It is with reluctance that I bring 
myself to admit that the same spirit which leads to success in 
war may also lead to success in the arts of peace. Yet so it 
seems to be. Men being what they are, nothing rouses them 
so thoroughly as fighting. The temper which then pervades 
a community communicates itself by imitation and emula- 



26 Free Trade, the Tariff and Reciprocity 

tion, and shows itself in all the manifestations of its activity. 
A great war lifts the minds of men to large undertakings, 
and takes its place with other factors in stimulating the full 
exercise of the powers of every individual. 

I am in danger of straying far from the subject in hand. 
Yet the digressions to which the argument for protection 
to young industries has led may serve to enforce one con- 
clusion to which the open minded consideration of the whole 
free-trade controversy must lead the inquirer: namely, that 
the effects of tariff legislation are commonly much over-esti- 
mated. Difficult as it may be to separate the causes of in- 
dustrial growth and to measure their relative weight, it is 
clear that the factors are many and various. The effects as- 
cribable to a protective system, either for particular indus- 
tries or for general economic growth, are among the subordi- 
nate phenomena, and far from having that transcendent im- 
portance so often proclaimed by its ardent advocates. 

Let me turn now to an opinion, or point of view, to which 
reference was made at the outset: the opinion that after all 
on this subject there is no fundamental principle. A set 
of writers, especially among contemporary German econo- 
mists, take what purports to be a severely judicial attitude. 
In their view there is no established theory, and no reason 
for ascribing greater validity to the doctrine of free trade 
than to that of protection. It is all a matter of advantage 
or disadvantage in the given case. Some countries may 
prove on inquiry to need free trade, some protection. A 
policy of opportunism is the only sensible one, and the con- 
troversies about theories of international exchange turn on 
barren abstractions which do not touch the concrete facts of 
industry. 

I confess to little patience with this attitude. It assumes 
to be large-minded and judicial, and a certain tinge of con- 
tempt for the old-fashioned theorists often goes with it. Yet 



The Present Position of the Doctrine of Free Trade 27 

in truth it usually rests on inability or unwillingness to 
follow the threads of severe reasoning. No doubt it is true 
that the concrete circumstances of a country must be exam- 
ined and considered before we apply to it a given policy, 
But it is none the less essential to make up our minds as to 
the principles on which the policy should rest. No doubt it 
is especially true that in weighing the chance of the advan- 
tageous application of protection to young industries, the 
actual conditions of each case and the prospects of success 
should be carefully studied. But it is none the less necessary 
to reflect what are the foundations and limitations of such 
protection and what are the real tests of success. On all 
such questions of principle we find often, too, a sad lack 
of clear-cut reasoning among our German colleagues. This 
defect does not show itself solely in the protective controversy. 
It appears in almost every part of the economic field, as soon 
as the more difficult problems are touched. On the theory 
of value, of distribution, of prices and the value of money, as 
well as on that of international trade, there is in many current 
manuals and text-books a pseudo-judicial attitude, which ad- 
mits some merit in this position as well as in its opposite, 
and opines that such and such a view must indeed be consid- 
ered but must not be pressed too far; with further double- 
facing expressions that end in leaving the reader quite in the 
dark as to the author's conclusions on the heart of the matter. 
It is easy to account for this stage of thought, especially 
among writers of the second rank. In many directions eco- 
nomic theory is being re-fashioned and on many topics there 
is not yet a consensus of opinion. At least there does not 
appear to be such a consensus ; though the differences among 
economic thinkers on the large questions of principle are 
much less fundamental than they are sometimes made to ap- 
pear. Yet it is not to be denied that on some deep-reaching 
topics, especially in the theory of distribution, economic 
theory is now in a stage of transition. As it happens, how- 



28 Free Trade, the Tariff and Reciprocity 

ever, there has been least attempt at change, and there is 
least occasion for change, in the theory of international trade. 
In that part of the subject, the edifice whose foundation was 
laid by Adam Smith and his contemporaries, and which was 
further built up by Eicardo, Senior, and the younger Mill, 
remains substantially as it was put together by these ancient 
worthies. Something has indeed been added by recent writ- 
ers ; yet nothing that calls for a remodeling of the old struc- 
ture. On the nature of international trade, on its peculiari- 
ties, its working machinery in the foreign exchanges and 
the flow of specie, its connection with the drift of labor and 
capital to different industries, its bearing on the demand for 
labor, and not least the effects of restrictions in the way of 
taxes — on all these topics the old doctrines have never been 
seriously shaken. Qualifications of one sort and another — 
deviations from the regime of freedom such as Adam Smith 
himself conspicuously enumerated — ■ contingencies under 
which commercial blows may be so planted as to convert an 
opponent into an ally — these have long been admitted. Cer- 
tain refined and ingenious trains of reasoning have been 
brought forward, too, of late years, regarding the effects of 
protective duties on the distribution of wealth and on the 
ultimate elements of social well-being. They connect them- 
selves with some of the more recent speculations in economic 
theory at large. Like these, they have had no effect, as yet 
at least, outside the small fringe of scholars and teachers, and 
no very marked effect even within that fringe. A discussion 
of them would carry this address far beyond the permissible 
limits. At best, they suggest only still further qualifications 
and still other possible exceptions, and they leave intact the 
core of the classic theory of international trade. That theory, 
in its essentials, holds its own without a serious rival. 

This being the case among the thinkers, the question nat- 
urally arises as to how it happens that the opposite theory, or 
at least the policy based on a very different theory, holds its 



The Present Position of the Doctrine of Free Trade 29 

own in the field of legislation. Some consideration, how- 
ever brief, must be given to this question in any inquiry as 
to the present position of the doctrine of free trade. 

There is no one explanation of the strong hold which pro- 
tection now has and bids fair for some time to maintain. 
The effectiveness of its appeal to the every-day man has al- 
ready been noted. The arguments about employment, labor, 
domestic industry, home markets and foreign markets, re- 
jected though they have been in all respectable economic writ- 
ing, emerge again and again. They will not down, and they 
create a set of prepossessions favorable to protectionist legis- 
lation. But in European countries (for the moment, I have 
not the United States in mind) its actual adoption has been 
immensely promoted by two other factors. One is the com- 
petition of new countries in agricultural products. The other 
is the growth and intensification of national feeling. 

The effect of the competition of new countries is obvious 
enough. With the cheapening of transportation, not only 
England, but France, Germany, and the other countries of 
Western Europe have been invaded by supplies of cheaper 
food and raw materials. The agricultural classes have felt 
the pressure of foreign competition. Formerly indifferent 
or even hostile to high tariffs, they have now been led to 
join in the demand for protection against cheaper foreign 
supplies. In England the agricultural interest has always 
been restive under free trade. In France and Germany, 
with the new democratic conditions, its influence now consti- 
tutes a strong political force against the application of that 
doctrine. 

Not less important, however, is the sentiment of national- 
ity and its unfortunate counterpart, the sentiment against for- 
eigners. Of the ennobling and beneficent effect of national 
feeling there is no need to speak. Its less favorable aspects 
unfortunately are most conspicuous in relation to our present 
subject. Cobden and the other English free-traders of half- 



30 Free Trade, the Tariff and Reciprocity 

a-century ago looked forward to a coming era of peace among 
nations, strengthened by the links of friendly exchange and 
mutual benefit. How sadly have these hopes been disap- 
pointed ! Militarism has become no less strong than it was, 
even stronger; and every European nation has held itself 
habitually in readiness for war. 

Even the sober economist, unmoved by sentiment, and 
looking solely to the direct and traceable consequences of 
this state of things, must admit that here is a situation that 
does not fit into the free-trade ideal. Great Britain, for 
example, depends for feeding her people on foreign sup- 
plies ; and it is an inevitable consequence, however regrettable 
a one, that she must have a powerful navy as security against 
starvation in case of war. No doubt the balance of material 
gain is in her case clearly in favor of free trade : it is cheaper 
to have a navy, even a huge and expensive one, than it would 
be to support her population at home. But, as international 
relations now stand, there exists this expense to be offset 
against the gain. In Germany at the present time the same 
set of persons who have advocated the development of Ger- 
many a& an exporting country and a " world-power," have 
demanded a great navy. Oddly enough, these same persons 
are protectionists also. But if a navy is needful to safeguard 
exports, it is no less needful for the imports which must also 
come. 

It is but another phase of the same drawback against the 
gain from international trade, that it is liable to interrup- 
tion. A war between the great countries, such as is always 
possible and often seems imminent, would greatly hamper 
foreign trade, conceivably destroy it. The greater the previ- 
ous extension of trade, the more complete the overturn of 
commerce; and he who looks on war as sooner or later in- 
evitable, and perhaps as not unwelcome, is not loath to have 
the industries of his country as self-contained and as self- 
dependent as possible. 



The Present Position of the Doctrine of Free Trade 31 

The national and militant feeling, however, has effects 
on public opinion far beyond such deliberate weighings of 
gain or loss under war and peace. It rouses a whole train 
of sentiments which run against trade with other countries. 
It fosters international rivalry in every sphere. Deliberate 
and accurate weighing of the benefits of foreign trade, such 
as it is the business of the economist to undertake, probably 
determines the opinions of a very small circle indeed. The 
state of mind of the immense majority is settled by their gen- 
eral feelings and prepossessions. These are in favor of the 
native country and against foreigners; in favor of home 
markets and home products, and against foreign competition. 
Add to this the strong appeal which protectionist reasoning 
makes to the instinctive prejudices and the inherent selfish- 
ness of the every-day man, and you have an explanation of its 
continued hold. 

In the United States the situation is different from that in 
European countries. Here we have in recent times no in- 
dustrial invasion from foreigners ; we are ourselves the in- 
vaders. The feeling of nationalism is doubtless strong, and 
has promoted protection effectively; but the peculiar fervor 
which militarism adds to it we have not experienced, unless it 
be under the conditions of the last few years. The main- 
tenance of our protective system — I will not say of any 
such system, but of the extreme and intolerant protection 
which we have developed — seems to be explicable chiefly on 
historical grounds. Certainly its beginning is not to be as- 
cribed to any deliberate choice. The system as it now stands 
goes back to the Civil War, and is the unexpected outcome 
of the heavy duties then suddenly imposed. It has main- 
tained itself chiefly by the effects of custom and iteration. 
The industries of the country have become habituated to it ; 
and what is no less important, public feeling has become 
habituated to it. As in England free trade has been the 
accepted doctrine from sheer force of use and habit, so in 



32 Free Trade, the Tariff and Reciprocity 

the United States protection has been the accepted doctrine. 
And, needless to say, just as continued material progress 
strengthened the hold of the accepted system in England, so 
it has strengthened the hold of the opposite system in the 
United States. The appeal to let well enough alone is always 
effective. The economic critic may see in other directions 
abundant explanation of our well-being, and may say that 
a country with such resources, such institutions, and such a 
population would have prospered under any commercial 
policy. But the fact of prosperity tells powerfully in favor 
of the legislation that in fact has been followed. It is not 
probable that any substantial change of policy will be made 
until this correspondence has been broken. When evil days 
come, as sooner or later come they doubtless will, then placid 
acquiescence in the existing order of things will no longer 
bolster up the protective system, and the time will be more 
propitious for a deliberate overhauling of accepted notions 
and beliefs. 

In conclusion, then, it may be said that the fundamental 
principle of free trade has been little shaken by all the dis- 
cussion and all the untoward events of the past half-century. 
But its application is not so easy and simple as was thought 
by the economists of half-a-century ago. A principle can be 
stated in clear-cut terms, and an answer of yes or no can be 
given with regard to it. The mode of its application, how- 
ever, raises questions of pro and con, and often involves a 
balancing of conflicting principles. The question of prin- 
ciple none the less remains important, and important for 
practical purposes. He who is convinced that the use of 
alcoholic liquors is overwhelmingly harmful may be uncer- 
tain, in the world as it is, whether to favor absolute pro- 
hibition, or government management, or private trade under 
license and control. Yet if he has the question of principle 
clearly settled in his mind, he will combat steadfastly popular 
errors about healthful effects of alcohol and will welcome 



The Present Position of the Doctrine of Free Trade 33 

every promising device towards checking its use. He who 
believes that war is evil and wasteful, and militarism pre- 
ponderantly bad in its spirit and effect, may regretfully 
admit that armies and navies must be maintained and much 
labor misapplied in the making and using of instruments 
of destruction. Yet he will oppose every unnecessary in- 
crease of armament, avoid every occasion for stirring others 
to rivalry in warlike preparation, and welcome every op- 
portunity for the peaceful settlement of disputes between na- 
tions. So he who believes that international trade is but 
one form, and no peculiar form, of the division of labor, and 
that like all division of labor it is preponderantly beneficial in 
its effects, may admit that its application in a given country 
raises problems not to be disposed of by mere appeal to this 
principle alone. Some of the qualifications have been con- 
sidered in what has preceded; and others will readily occur 
to you, such as the demands of public revenue, a needful re- 
gard for vested interests, the political and social effects of 
trade within the country and without. But in considering 
any question of concrete commercial policy, it is necessary 
first to know whether a restriction on foreign trade is pre- 
sumably a cause of gain or loss. Is a protective tariff some- 
thing to be regretted, for which an offset is to be sought in 
the way of advantage in other directions, or something 
which in itself brings an advantage? The essence of the 
doctrine of free trade is that prima facie international trade 
brings a gain and that restrictions on it presumably bring a 
loss. Departures from this principle, though by no means 
impossible of justification, need to prove their case; and if 
made in view of the pressure of opposing principles, they are 
matter for regret. In this sense, the doctrine of free trade, 
however widely rejected in the world of politics, holds its own 
in the sphere of the intellect. 



II 

ABRAHAM LINCOLN ON THE TARIFF, 

A MYTH X 

Those who have followed the campaign literature on the 
tariff during recent years will have become familiar with a 
phrase attributed to Abraham Lincoln. The following ver- 
sion is taken from Curtiss's Industrial Development of Na- 
tions (1912), a pretentious three-volume publication, in which 
are collected indiscriminately all sorts of protectionist ar- 
guments. Under a portrait of Lincoln this is printed : — 

" I do not know much about the tariff, but I know this much, when 
we buy manufactured goods abroad, we get the goods and the 
foreigner gets the money. When we buy the manufactured goods 
at home, we get both the goods and the money." 2 

No reference is given by Curtiss to Lincoln's writings; 
nor is such a reference given in any place where I have found 
the phrase quoted. A careful examination of the various 
editions of Lincoln's published works brings to light nothing 
that remotely resembles it. There is nothing in either of the 
two editions of his writings put together by Nicolay and Hay, 
nor is there anything in the so-called Federal Edition. Nico- 

i From the Quarterly Journal of Economics, August, 1914. 

2 Vol. iii, p. 6. Elsewhere in the book the version is in somewhat dif- 
ferent form : " Abraham Lincoln said : ' When an American paid $20 
for steel rails to an English manufacturer, America had the steel and 
England had the $20. But when he paid $20 for the steel to an Ameri- 
can manufacturer, America had both the steel and the $20.' " Ibid., 
vol. ii, p. 471. — This obviously is an anachronism, since such a thing as 
a steel rail was unknown in Lincoln's time. 

34 



Abraham Lincoln on the Tariff 35 

lay and Hay's Life yields nothing of the sort, nor any of 
the biographies. So with Lincoln's Speeches in Congress 
and his Messages to Congress. There is no lack, to be sure, 
of references to the tariff by Lincoln. He began his political 
career as a Whig, and remained a protectionist ; though during 
the decade preceding the war his political insight led him 
to put it aside as an issue on which to appeal to the people. 
Those who are interested in the history of the tariff contro- 
versy may find it worth while to turn to some notes of his 
written in 1846-47, containing a sketch of an address on 
the tariff. Here the main thought is that labor given to 
transporting a commodity from foreign countries is wasted, 
if the commodity can be produced within the country with as 
little labor as elsewhere. 3 This may be an echo of some of 
Carey's well-known utterances; and it could be made the 
text for some explanation of the principle of comparative 
cost. A passage of a similar sort is in an address made at 
Pittsburgh in 1861, indicating that Lincoln had kept this 
particular turn of reasoning in mind. But there is not 
the slightest suggestion of the much-quoted phrase. 

Now, what is the history of the phrase ? 

The very first mention which we have found 4 is in 1894, 
in the American Economist, a weekly protectionist sheet pub- 
lished in New York. In that periodical for June 29, 1894, 
the following is given as having been copied from the In- 
dependent of Howard, Illinois, of June 9, 1894: — 

" Lincoln's first speech on the tariff question was shQrt and to the 
point. He said he did not pretend to be learned in political econ- 
omy, but he thought that he knew enough to know that ' when an 
American paid twenty dollars for steel to an English manufac- 
turer, America had the steel and England had the twenty dollars. 

3 Lincoln's Complete Works (2 vol. edition), vol. i, p. 90. Cf. p. 679 
for the Pittsburgh address. 

* I say " we," because in the endeavor to trace the phrase to its origin 
I have had invaluable assistance from Dr. D. M. Matteson, well-known 
for his thoroughness in research on problems of American history. 



36 Free Trade, the Tariff and Reciprocity 

But when he paid twenty dollars for the steel to an American 
manufacturer, America had both the steel and the twenty dollars/ " 

In a later issue (Oct. 26) of the American Economist of 
that same year, it is stated that another newspaper, the Peoria 
Journal, protested that the a goods and money " speech was 
made at Kewanee ; while still another newspaper, the Chicago 
Record, pointed out that this version was not at all in accord 
with Herndon's report of Lincoln's first speech. 6 

That the phrase was not current before 1894, at least in its 
attribution to Lincoln, and probably was not known at all, 
is indicated by its absence from those collections of opinions 
of " the fathers " which form a familiar part of the protec- 
tionist stock in trade. It is not to be found in Stebbins' 
American Protectionist's Manual (1883) ; though Lincoln 
is there mentioned as being " in favor of a high protective 
tariff." Nor is it in a tract published in 1892 by the Ameri- 
can Iron & Steel Association, under the title The Testimony 
of the Fathers. The tract contains a choice collection of 
excerpts from the utterances of Hamilton, Jefferson, Calhoun, 
Webster, Clay, even Fillmore and Buchanan ; but not a word 
from Lincoln. Nor is it used with any frequency for some 
years after its first appearance in 1894. But after 1900 it 
turns up repeatedly in the file of the American Economist: 
in 1901, in 1905, twice in 1906, again in 1908. 6 After the 

s Dr. Matteson reports that Howard, 111., appeared on the maps until 
about 1902; since then a village at the same spot — a mere junction- 
point, apparently — is named w Lotus " on the map. It is in the north- 
west corner of Champaign County, forty miles from Lincoln's early home 
at New Salem. Dr. Matteson adds: "I am forced to the conclusion 
that the Howard Independent is a myth, or at least a misprint. The 
post-master at Lotus writes me that no paper has ever been printed 
there; and there is no other town in Illinois, so far as I have been able 
to discover, with which the name Howard is associated. No Howard 
Independent was published elsewhere in the United States, according to 
the newspaper directories of 1891, 1894-95, and the last issue." 

6 May 10, 1901; June 9, 1905; Feb. 16 and Dec. 21, 1906; Dec. 18, 
1908; Dec. 23, 1910. The set of the American Economist in the Har- 



Abraham Lincoln on the Tariff 37 

very first appearance, the commodity mentioned seems to be 
invariably rails — sometimes iron rails, sometimes steel rails. 
Usually, a newspaper is quoted as having used the phrase or 
reported its use. Thus, in 1905, the following is quoted 
from the Worcester Telegram : — 

" Senator Scott of West Virginia is scored in some places for quot- 
ing President Lincoln in support of the policy of standing pat on 
the Tariff issue, and some of the critics appear to doubt that Lin- 
coln ever used the words attributed to him. The words at least 
are good enough to have been used by the war President. Senator 
Scott says: ' President Lincoln once remarked that if we gave 
$30 a ton for iron rails made in this country we would have both 
the rails and the money, but if we bought them in England the 
rails only would be ours, while the Britishers would get the cash/ 
. . . Neither does it matter . . . whether the rails . . . are iron of 
the days of Lincoln or the steel of to-day." 

In 1908, again, the then Secretary of the Treasury, Leslie 
M. Shaw, is quoted in the Economist as having used the quota- 
tion in a Boston speech. 

The first appearance for express campaign use appears to 
be in 1904. The phrase is to be found in the Bepublican 
Campaign Book of that year. In earlier campaign books, 
for 1892, 1896, 1900, it does not appear; although in that of 
1896 Lincoln is cited as an advocate of protection. Evi- 
dently the phrase was not widely known during these earlier 
years. In the Campaign Book of 1904, there is an extended 
quotation from Lincoln's tariff notes of 1846-47 (referred to 
a moment ago) and then at the close we find: — 

" On another occasion Mr. Lincoln is quoted 7 as saying : ' I am 
not posted on the tariff, but I know that if I give my wife twenty 
dollars to buy a cloak and she buys one made in free-trade England, 

vard Library is not complete; there may be other references in the 
missing numbers. 

7 Italics are mine. The guarded way in which the passage is used 
would seem to indicate suspicion. It does not appear in the Republi- 
can Campaign Handbooks of 1908 and of 1912. 



38 Free Trade, the Tariff and Reciprocity 

we have the cloak, but England has the twenty dollars ; while if she 
buys a cloak made in the protected United States, we have the cloak 
and the twenty dollars.' " 

Here, it will be observed, " a cloak " appears. In a speech 
by McCleary of Minnesota, in the House of Kepresentatives, 
April 22, 1904, 8 " a dress " and u my wife " appear, with 
the same sum of $20. It may be that the campaign book 
version of 1904 was taken from McCleary's speech. 

In 1910 the phrase appears conspicuously in a booklet en- 
titled Story of a Tariff, published by the American Protective 
Tariff League — the organization which publishes the Ameri- 
can Economist also. This booklet lauds the tariff of 1909 as 
" the best tariff bill (sic) the Eepublican party ever passed," 
and gives a quantity of extracts from speeches on that meas- 
ure. On the inside cover page there is printed in large type 
" Lincoln's Tariff Creed," in these words : — 

" Secretary Stanton once asked Abraham Lincoln what he thought 
of a Protective Tariff. Mr. Lincoln replied : ' I don't know much 
about the Tariff, but I do know that if my wife buys her cloak in 
America, we get the money and the cloak, and that American labor 
is paid for producing it ; if she buys her cloak abroad, we get only 
the cloak, the other country gets the money, and foreign labor re- 
ceives the benefit.' " 

It will be observed that this is somewhat enriched. Ameri- 
can labor and foreign labor are smuggled in; and not only 
is the wife introduced, but Secretary Stanton also. 9 

s Congressional Record, 58 Cong., 2 Session, appendix, p. 246. 

9 In response to an inquiry, Mr. W. F. Wakeman, Secretary of the 
American Protective Tariff League, wrote me on June 28, 1914: " About 
five years ago I took up this subject of what Lincoln really did say on 
the Tariff Question and found that the extract as printed is correct. I 
consulted the family and every possible authority. I will try to run 
over the original correspondence shortly and give you additional infor- 
mation if desired." But the information, though asked for, has not been 
supplied. Mr. Wakeman was Secretary of the League in 1894, and has 
been so ever since, except in 1900-1901, when he was Appraiser in 
New York. 



Abraham Lincoln on the Tariff 39 

~Not the least interesting episode in the history of the 
phrase is its voyage across the water and subsequent return 
to the United States. In 1908, the American Economist re- 
ports that a London correspondent has written : — 

" An interesting development has been the appeal to Abraham Lin- 
coln ... as the final authority in an English fiscal controversy. 
... A number of Unionist papers closed the controversy simul- 
taneously by quoting the following extract from a speech made by 
Lincoln shortly before his death : ' The problem seems to me a 
simple one. If we adopt Free Trade it means that we import our 
goods, in which case the foreigner will have our money and the 
work, and we his goods. If, however, we adopt a system of Pro- 
tection, or a system of safeguarding our industries and our working 
classes, thereby manufacturing the goods ourselves, the result will 
be that we shall have the goods, the money, and the employment/ " 

It will be observed that here Lincoln is supposed to have 
made the remark shortly before his death; whereas on its 
emergence it was supposed to have been made in his first 
speech. 

Very recently, the English " tariff reformers " have 
utilized it again. They distributed (apparently in the course 
of 1913) a post card bearing within an ornamental scroll 
the following printed text : — 

"I do not know much about the tariff, but I do know this much: 
when we buy goods abroad, we get the goods, and the foreigner gets 
the money : when we buy goods made at home, we get both the goods 
and the money." — Abraham Lincoln. 

This naturally led to attack by free traders, in the columns 
of the Manchester Guardian. The Guardian in turn made 
its way to this country, and thereupon our loyal protectionists 
were led to retort that this shallow newspaper " in an un- 
guarded moment recently allowed its finespun theory of free 
trade to come into direct conflict with the protectionist com- 
mon sense of Abraham Lincoln/' 10 

io See the Textile Record (Boston), July, 1913. I have been able to 



40 Free Trade, tine Tariff and Reciprocity 

Finally, the phrase has descended to base uses indeed. 
In recent issues of New York newspapers, a brand of shoes 
is advertised as " made from American materials, with home 
labor and by home capital," and then follows the precise 
passage quoted a moment ago from the Story of a Tariff of 
1910, with the interpolations about American labor and for- 
eign labor, and the reference to Secretary Stanton. The 
advertisement, however, seems not to have been found ad- 
vantageous. The advertiser was overwhelmed by a host of 
inquiries, and made a public reply in which he withdrew 
behind the shelter of the Protective League and its publica- 
tions; and he refrained from continuing the advertisement. 11 

It seems certain that the phrase is apocryphal. There is 
no evidence that Lincoln ever used it. Further search may 
show just how it originated. Possibly the claptrap about the 
" goods and the money " was invented before it was foisted 
on Lincoln; possibly it was ascribed to him at an earlier 
date than the first here noted (1894). By dint of repeti- 
tion it has come to be associated with Lincoln almost as much 
as the cherry tree is associated with Washington. So crude 
is the reasoning (if such it can be called), so vulgarly fal- 
lacious is the antithesis, that we must hope that it will 
cease to be invested with the sanction of a venerated name. 12 

secure little information about the British episode. The Literary Secre- 
tary of the Tariff Reform League writes me : " We have no post-card 
containing the quotation from Lincoln, nor to the best of my knowledge 
have we ever issued such a post-card. . . . The quotation is of course 
well known to us, and it is quite possible we may have referred to it in 
our ' Monthly Notes,' though not in any recent years." Another cor- 
respondent in England suggests that a branch of the League may have 
circulated the card. 

ii The advertisement appeared in New York in the Journal of Com- 
merce and the Times, May, 1914; perhaps in other newspapers also. 
The advertiser's answer to inquiries was in the Times of May 18. 

12 Since this note was prepared, my attention has been called to a 
letter of Mr. Horace White's in the New York Evening Post of April 
10, 1914. Mr. White points out that nothing like the oft-cited passage 
is to be found in Lincoln's writings, and pungently concludes : " My 



Abraham Lincoln on the Tariff 41 



a sequel 13 

The note which I published in the August issue of this 
Journal on the tariff phrase attributed to Lincoln (getting 
" both the goods and the money") has stirred discussion, as 
is natural with anything that concerns the great president. 
Some further light upon the origin of the phrase has come 
in consequence. For most of the information which I am 
now able to give, I am indebted to Mr. Calvin W. Lewis of 
Brookline, Massachusetts, who first called attention to some 
of the clues in contributions to the Boston Transcript signed 
with a pseudonym, and who has since put at my disposal in 
the most obliging way the results of his inquiries. 

It will be remembered that the earliest appearance of the 
phrase, so far as Dr. Matteson and myself were able to trace 
it, was in the American Economist for June 29, 1894, where 
it was stated to have been copied from the Howard Independ- 
ent of June 9, 1894. The Howard Independent proved a 
puzzle. Dr. Matteson was able to find no trace of any such 
newspaper, and concluded that it was " a myth, or at least a 
misprint." The puzzle was not lessened by the failure of 
the American Economist to give any explanation. Our note 
was brought to the attention of the Economist, and some ref- 
erence has been made in its columns to Lincoln's utterances 
upon the tariff and to this particular myth; but no attempt 
was made to verify, or specify further, the source from which 
the phrase had come. A suspicion could not but arise that 
the phrase might have been manufactured by the Economist, 
and that the Howard Independent was a pretense. 

That suspicion proves to be quite without foundation. 
The Howard Independent is not a myth ; but, as Dr. Matte- 
son thought possible, it is — a misprint. It appears that 

reason for thinking that Lincoln never said this is that he was not a 
fool." 

is From the Quarterly Journal of Economics, February, 1915. 



42 Free Trade, the Tariff and Reciprocity 

there is in Illinois a flourishing town by the name of Harvard, 
and that a weekly newspaper, the Harvard Independent, has 
been published there for many years. " Howard Independ- 
ent " was merely a misprint for " Harvard Independent" 
Moreover, Mr. Lewis, through correspondence with the pres- 
ent editor of the Harvard Independent, has learned from 
him that a search in his files brought to light, in the issue of 
the date stated, June 9, 1894, the identical phrase. It is 
there, and the American Economist copied it in good faith 
and with due credit. It is not surprising that the editor of 
the American Economist, after the lapse of twenty years, 
should have quite forgotten just how he happened on the 
phrase, and should now find it as difficult to trace as the rest 
of us. Any suspicion of fabrication on his part was quite 
without foundation. 

But all this only serves to push the inquiry one step further 
back. Where did the Harvard Independent get the phrase ? 

In the works of Eobert G. Ingersoll there is an oration 
upon Lincoln, which bears the date 1894. In it there is a 
passage 14 which says that Lincoln was " nominated for the 
legislature and made a speech," and that this speech was in 
favor of a protective tariff. Ingersoll refers to it shortly 
after as Lincoln's first speech. After some remarks about 
the influence of manufactures in " developing the brain " and 
"giving wings to the imagination," Ingersoll goes on thus: 

" It is better for Americans to purchase from Americans, 
even if the things purchased cost more. 

u If we purchase a ton of steel rails from England for 
twenty dollars, then we have the rails and England the money. 
But if we buy a ton of steel rails from an American for 
twenty-five dollars, then America has the rails and the money 
both." 

i* See vol. Ill, pp. 127-128 of the " Dresden Edition " of the Works of 
Robert G. Ingersoll (New York, 1900). The oration, or lecture, is also 
reprinted as an introduction to the seventh volume of " Lincoln's Col- 
lected Writings," edited by Nicolay and Hay (New York, 1905). 



Abraham Lincoln on the Tariff 43 

It will be observed that this differs in one significant par- 
ticular from the phrase attributed to Lincoln. The purchase 
from the American is supposed to be at a higher price than 
that from the Englishman — twenty-five dollars instead of 
twenty dollars ; the allegation is that it is more advantageous 
to buy at home, even at the higher price. 

There are still other grounds for questioning whether this 
passage, as it appears in print, was the source of our myth. 
It is not put by Ingersoll in quotation marks, nor is there any 
intimation or implication that it is taken from Lincoln. 
Ingersoll mentions steel rails ; if he had wished to imply that 
1 the language was Lincoln's, he would hardly have selected an 
article not known in Lincoln's day. A careless reader might 
possibly infer this to be a paraphrase or quotation from Lin- 
coln; but only a careless one. More important is the cir- 
j cumstance that internal evidence points to its having been 
published at a later date than that of the passage in the 
Harvard Independent (June, 1894). Immediately follow- 
( ing the two paragraphs just quoted Ingersoll goes on: 
| " Judging from the present universal depression and the 
I recent elections, Lincoln, in his first speech, stood on solid 
rock and was absolutely right." " Eecent elections " must 
refer to the elections of the autumn of 1894. The elections of 
I 1892 were not favorable for the Republicans, but those of 
I 1894 were. It is the latter only to which Ingersoll could 
\ have alluded. The date of the oration in its printed form is 
j clearly later than that of the appearance of the phrase in the 
i Harvard Independent. 

Nevertheless, I am disposed to believe that Ingersoll's ora- 
tion is the fons et origo of the myth ; not as it is printed in 
his works, but as delivered before. Ingersoll was much in 
I demand as a lecturer and political speaker. For years he 
I orated on the lyceum platform and spoke at political rallies. 
The oration on Lincoln doubtless was delivered many and 
I many a time before it was put into cold print. The tariff 



44 Free Trade, the Tariff and Reciprocity 

phrase doubtless figured in it, and was likely to stick in the 
memory of hearers ; and in this way the Harvard Independ- 
ent probably got hold of it. Hearing it as delivered, with the 
dramatic emphasis of which Ingersoll was a master, the re- 
porter would not fail to remember it, and at the same time 
would naturally suppose it to be a quotation from Lincoln, not 
an epigram of the orator's. The circumstance that the dif- 
ference in price between English and American rails, which 
is an important part of IngersolPs version, does not appear 
in the Harvard Independent or in other places, is entirely 
consistent with its having had its origin in a vaguely mem- 
orized report of spoken words. 

In sum, the indications now seem to be that Ingersoll' s 
oration, notwithstanding its having appeared in print at a 
later date than the first published version of the phrase, is 
nevertheless the source. It is precisely such as Ingersoll 
might have invented — epigrammatic and fetching. No evi- 
dence has been adduced, or is likely to be, that it originated 
with Lincoln or was ever used by him. 

EPILOG 

The question has been put to me from one quarter and 
another : why dismiss the argument in such cavalier fashion ? 
Be it Lincoln's or another's, it has an appearance of reason- 
ableness, to some persons even of conclusiveness. That there 
is a strong appeal in this way of putting the case for pro- 
tection cannot be denied. Is it quite beneath contempt ? Is 
he who so puts the case necessarily a fool ? 

Not stupidity has to be dealt with ; simply blank ignorance. 
One must restate truths which ought to be familiar, as well 
established and in their essence simple. 

Briefly, the grounds for curt dismissal are as follows. 
First, the main error is to suppose that we pay for imports by 
sending out money; that importation means loss of money; 



Abraham Lincoln on the Tariff 45 

and that a lessening of imports means a gain or accumula- 
tion of money. And in the converse case, when we export 
or increase our exports, it is an error to assume that we profit 
by gaining money or accumulating money. The most ob- 
vious fact in international trade is that imports are not paid 
for by sending out money, and that we do not get more 
money by lessening our imports ; neither is money procured 
by the sale of exports. It is the exported goods that pay for 
those imported. A decrease of imports means a decrease 
of exports, not a corresponding inflow of money, and an in- 
crease of exports means an increase of imports, not an in- 
flow of money. True, each individual transaction is in 
terms of money. But the transactions are offset, and the 
great bulk of the payments are effected without the remit- 
tance of cash. The details of the course of trade between 
nations, the use of bills of exchange and the rates of foreign 
exchange, the process by which merchandise transactions are 
offset — all this would make a long story, which must be 
left to the various books, elementary or elaborate, on the 
mechanism of international trade. The topic is not with- 
out its intricacies and difficulties, but is better understood 
than almost any other in the field of economics. If there is 
one thing established in that field, it is that a country's goods 
sent out of its borders serve to pay for the goods imported ; 
they do not bring in corresponding amounts of money or en- 
able money to be piled up. 

It is true, and is also a commonplace, that a change in im- 
ports or exports often stimulates an initial and temporary 
movement of money (gold). Under the ordinary conditions 
of peaceful trade, there is a constant flow and reflow of gold 
between countries, serving to give a start to the movement of 
goods and also to equalize balances of payment. But the 
movement of money is always small in comparison with the 
total transactions. It is usually of minor importance, too, 
in its effect on general business conditions; and when, as 



46 Free Trade, the Tariff and Reciprocity 

sometimes happens, of serious importance, it is so rather 
as an effect than as a cause, as a symptom rather than as an 
ill or benefit in itself. To maintain or imply that gold 
flows for each item of imports or exports, or that a cutting 
down of imports results in an unending enrichment of a 
country through an inflow of money, simply indicates gross 
ignorance. 

Next, the inquirer must rid his thoughts of the very idea 
of a country's enrichment by the process of buying less from 
foreigners or selling more to them. This is the most insidious 
part of the error; most insidious because it applies notions 
familiar in private affairs to the quite different problems of 
public welfare and national prosperity. Buy less and sell 
more — is not this the way an individual gets rich ? But it 
is not the way in which a nation gets rich, least of all in 
its trade with other nations. Produce more and consume 
less — so much one might lay down. Thereby a nation does 
indeed accumulate capital and in a sense grow rich ; that is, 
it does accumulate the capital indispensable for continuing 
prosperity. But accumulate money by buying less from 
foreign countries and selling more to them? Even if a 
country could really achieve the result, and could have the 
money pouring in year after year, it would not become richer 
in the only sense in which riches conduce to the general 
welfare. General welfare means that we have more of the 
necessities and conveniences of life — more food, clothing, 
houses, amusements. Money is only a symbol, a medium of 
exchange, a means of buying the things wanted. All the 
piling up of money in the world would not make the world 
better off; and the perpetual piling up of money in a single 
country would not make that country more prosperous. 

Unfortunately, our daily use of money and our daily pre- 
occupations with private business affairs render it most nat- 
ural for the ordinary man to think of riches as money, and 
of sales as the source of profit ; and then to think of the com- 



Abraham Lincoln on the Tariff 47 

munity's affairs in the same terms as of his own afiairs. 
The persistence of what the economist calls the mercantilist 
view is the most trying experience of his profession. It is 
in flat contradiction with truths established of old and ac- 
cepted by every competent judge. Yet the familiar fallacy 
crops out everywhere and on all sorts of occasions, and seems 
to be quite ineradicable. Its deeprooted hold explains the 
vogue of the phrase ascribed to Lincoln; explains why the 
economist breathes a sigh of relief on finding that the great 
name cannot be associated with it ; explains, too, why he dis- 
plays a touch of impatience when asked once more to supply a 
refutation. 



Ill 

HOW THE TAKIFF AFFECTS WAGES 1 



The form in which the argument that the tariff raises 
wages is commonly presented is that of a simple compari- 
son of money wages in the United States with money wages 
in foreign countries. To most people this is a plain and 
convincing way of putting it. If A pays only fifty cents a 
day to his workmen, and B pays a dollar a day, it seems clear 
that A can undersell B, and that B cannot compete with A 
unless he reduces his wages to A's rates. The application 
of this reasoning to our protective duties is familiar enough : 
if duties are lowered, American employers must either pay 
lower wages or abandon the field. 

This belief is not merely widespread : it is something like 
an article of faith with millions of Americans, probably 
with a majority of our people. It is congenial to the aver- 
age man's way of thinking about economic matters, and is 
as firmly held by most of the business men and well-to-do 
as by the manual workmen. It has been incessantly dinned 
into the ears of both by protectionists for half a century. 
That it is a potent device for bolstering up protective tariffs 
is shown by the fact that it is utilized, not only in our own 
country, but in others also — in those with low wages as 
well as those with high. In Germany, France, and Italy, 
the appeal for the safeguarding of the laboring man's wages 
against foreign competition is as universal and probably as 

i Atlantic Monthly, September, 1919. 

48 



How the Tariff Affects Wages 49 

fetching as in the United States. And the appeal is sincere. 
No doubt, manufacturers and others engaged in protected in- 
dustries push it for all it is worth, but not usually with con- 
scious demagogy. Certainly in our own country those who 
make the appeal and those moved by it believe in their hearts 
that our standard of living and the very basis of our pros- 
perity rest on the maintenance of a system of high duties. 
Only this will prevent the pauper-paid laborer of Europe 
and Asia from sending us cheap products which will compel 
the lowering of wages to a pauper standard. 

And yet the verdict of economists is unanimously the other 
way. Perhaps unanimous is too strong a term; but virtual 
agreement there is. I know of no economist, certainly none 
in England or this country, who would sanction the pauper- 
labor argument. The extraordinary perversion of thought 
on all international matters which has resulted from the in- 
flamed rivalries of Continental countries during the last 
half century has affected their economic thought on all mat- 
ters relating to trade; and persons of academic repute can 
be found who give sanction to the talk of the vulgar. A 
lack of clear thinking and of honest statement has been among 
the many lamentable consequences of the mad struggle for 
power. Even so, no economist of standing would main- 
tain that a protective tariff is the one decisive factor in mak- 
ing a country's rate of wages high. 

There are familiar facts in plenty which run counter to 
the argument. They are familiar, but, as is so often the 
case, people fail to see the significance of that which stares 
them in the face. A plain fact, universally known, is that 
we regularly export from the United States goods to the value 
of billions of dollars. How can this be if low-paid labor 
can always undersell high-paid labor? Wages in terms of 
money, and in terms of commodities also, are higher in the 
United States in all occupations, of whatever kind. Yet 
we know that not all employers of every kind are undersold 



50 Free Trade, the Tariff and Reciprocity 

by their foreign competitors. The simple existence of an 
export trade proves that they are not; nay, that so far as 
there is any underselling, it is the Americans who undersell 
the foreigners. 

We export an extraordinary quantity and variety of ar- 
ticles: agricultural products like cotton and wheat, crude 
and semi-manufactured products like mineral ores, timber, 
and copper, and all sorts of manufactured goods — cotton 
fabrics, iron and steel in all stages, machinery and tools. All 
the laborers who are employed in making these exported ar- 
ticles get higher wages than those employed in making similar 
things abroad. Yet the very fact of exportation proves that 
the articles are sold at least as cheaply as the competing 
foreign articles. Wages in agriculture are higher here than 
in England or Eussia. Thirty years ago, the English agri- 
cultural laborer got ten to fifteen shillings a week, or some- 
where between ten and fifteen dollars a month, and out of 
this had to pay his own board and lodging. In the United 
States a farm-hand then got eighteen to twenty dollars a 
month, and got his board and lodging in addition. In re- 
cent times, wages in both countries have risen greatly; yet 
the difference in favor of the American has persisted. The 
Canadian farmer has been paying no less than the American. 
Notwithstanding this sustained higher rate of pay in the 
United States and Canada, agricultural products have con- 
tinued to be regularly exported. American and Canadian 
farms, while paying higher wages than the British, are 
sending their wheat to England, even under the handicap of 
high freight charges by land and water. They are meeting 
the British farmers in the British market ; and meeting not 
only the British, but the Russians, whose wages are even 
lower. 

So in semi-manufactured and manufactured articles. 
Copper-miners in the United States, and the men engaged 
in the smelting and refining plants, get higher wages than 



How the Tariff Affects Wages 51 

men doing the same work anywhere the world over; yet 
American copper is sold the world over. The laborers and 
mechanics in the agricultural machinery and sewing-machine 
industries get high pay; yet these are great articles of ex- 
port. One of the striking changes in our international trade 
during the first decade of this century has been the enormous 
increase in the exports of the semi-manufactured forms of 
iron and steel. The total exports of structural steel, rods, 
rails, and wire rose to hundreds and hundreds of millions in 
the years 1912 to 1914 — years preceding the war, which 
were not affected by abnormal war conditions. 

Still another set of facts may be adduced, not so familiar 
as those relating to our enormous export trade, yet familiar 
enough, and equally inconsistent with the belief that a coun- 
try where wages are high must be undersold under free 
trade by one where wages are low. Great Britain has main- 
tained complete free trade since the middle of the nineteenth 
century. The situation has endured without change for over 
half a century — ample time for testing the matter. No 
import duties have been imposed, except a few of strictly 
revenue character on articles such as tea and coffee. Com- 
modities of every other kind have been admitted to Great 
Britain from foreign countries free, competing on equal 
terms with those of British production. India, Japan, 
China, Turkey, Italy, France, Germany — some of them 
with wages vastly lower than the British, all with wages con- 
siderably lower — could send their goods to England without 
let or hindrance. India, with hundreds of millions of the 
cheapest labor, and in closest commercial contact with Great 
Britain; Japan, fast outgrowing her old industrial system 
and keen to enter modern trade ; Trance and Germany, just 
across the Channel and eager for exports — everywhere 
wages were lower, and in the Orient lower to an extent that 
would well-nigh paralyze with fright an American protec- 
tionist contemplating free trade with such regions. And yet 



52 Free Trade, the Tariff and Reciprocity 

England grew and prospered. British India, apparently the 
most dangerous competitor because so directly linked with 
the imperial country, so far from threatening English indus- 
try, actually asked for protection against the competition of 
the English cotton manufacturers who paid wages much 
higher. So did the French and Germans; their protective 
measures were directed against the country of higher wages. 
And English wages, high at the beginning of the period, not 
only remained high, but advanced markedly between the 
middle and the close of the nineteenth century. 

The explanation of all such facts is simple. Turn to the 
most familiar fact of all — the continuing exports from the 
country of high wages to those of low wages. The workman 
whose labor is embodied in the exports is paid more ; but he 
also produces more. The labor is more effective, and the em- 
ployer can therefore afford to pay more for it. Sometimes, 
as in the case of wheat and iron and copper, the same exertion 
produces a greater quantity of identically the same article. 
Sometimes, as with our exported cottons, it produces a greater 
quantity and also a better quality. Sometimes again, as in 
the case of our sewing-machines and agricultural implements, 
the greater effectiveness consists in producing an article 
which is better made and better adapted to its purposes. 
The greater (or better) product yields a larger gross return 
to the employer, even though not a larger sum per unit, than 
the return from similar labor elsewhere; and the employer 
is able to pay higher money wages. Not only is he able to 
do so, but he must : for thousands of employers compete with 
each other for laborers ; and the result must be that wages will 
be high in some proportion to the productiveness of the 
laborers. 

Beyond doubt this is the fundamental explanation of the 
differences that prevail in the various parts of the world. 
The plain reason why wages are very low in India and 
China, higher but still meager in countries like Italy and 



How the Tariff Affects Wages 53 

Austria, comparatively high in England and Germany, and 
highest of all in the United States, is to be found in the vary- 
ing productiveness of labor in these countries. 

The relation between Great Britain and Germany under 
British free trade illustrates in another way the same simple 
principle. The illustration is not so obvious, yet rests again 
on broad facts of general knowledge; it involves no labored 
investigation. In Germany in the middle of the nineteenth 
century, when Great Britain entered on her free-trade career, 
wages were considerably lower than in that country. Yet, 
it was not Great Britain's industries that feared Germany's 
competition, but just the contrary: it was Germany that 
adopted protection (not extreme in those days) designed 
chiefly to keep out British manufactured goods. As time 
went on, the trend of wages came to be upward in Germany 
as well as in Great Britain ; and the rate of advance in Ger- 
many, though not the actual level, was even higher. True, 
wages in Germany did not attain the British range, either in 
money or in commodities, at any time up to the Great War. 
But starting as they did from a level much lower, they showed 
a more marked advance. 

]S!ow, it might have been supposed that, as wages rose in 
Germany, this country would have become a less dangerous 
competitor in the " markets of the world," which play so 
large a part in the ordinary discussion of international 
competition. Not so : German exports grew . and German 
competition came to be feared during the very period in 
which German wages were steadily rising. And the ex- 
planation is again simple. One and the same fact under- 
lies the advance in wages and the growth of exports — in- 
creasing effectiveness of German labor, especially in the 
exporting industries. The causes of that increasing effective- 
ness were various : partly that Germany, starting from a low 
level, acquired with rapidity the methods and machinery 
of modern industry ; partly the exercise of care, persistence, 



54 Free Trade, the Tariff and Reciprocity 

and skill in some branches of applied science; and partly 
a burst of leadership which was associated with political and 
military ambition. It matters not for the present purpose 
what the causes were. The main thing is that advancing 
wages proved no obstacle to exports and no stimulus to im- 
ports. 

ii 

The general proposition that a high rate of wages is the 
result of a high productiveness of industry is simple and un- 
deniable. In a sense it is superficial; it may be said to 
be a truism, though it is one of those truisms which are 
constantly forgotten. Beyond doubt there remain questions 
much more difficult. Just how and through what channel 
or mechanism does high general productivity lead to the 
high wages ? And what determines the share of the total 
product, be that great or small, which shall go to the laborer, 
the employer, the owner of capital, the owner of land ? But 
these questions, the most important and perhaps the most 
complex in the field of economics, lie quite outside the tariff 
controversy. Wide-ranging as that controversy is, this limi- 
tation of its scope seems to be generally recognized. In 
popular discussions of the tariff, the relations of labor and 
capital and the distribution of wealth and income are not 
usually touched, and we need not here concern ourselves 
with them. It suffices for the purpose in hand to get a 
broad explanation of the differences in wages in different 
countries, such as we find in the varying productiveness of 
labor. The explanation is so simple, and the notion that a 
high tariff causes general high wages is so flatly contradicted 
by plain facts, as well as by simple reasoning, that any 
elaborated discussion of it would call for an apology if the 
tariff-and-wages argument were constantly repeated. 

In truth, few intelligent and unbiased persons would 
seriously argue that protective duties are the chief cause of 



How the Tariff Affects Wages 55 

high wages in the United States. But many would doubt- 
less say that the duties keep up the wages in certain indus- 
tries, and therefore at least help to maintain them, not in 
those only, but in all others. On the other hand, the oppo- 
nents of protective duties generally argue that duties keep 
wages high in no industry whatever, and that, when they 
affect wages at all, they always tend to lower them. An 
examination of these conflicting views will enable us better 
to understand what is the real situation. 

Begin with the line of argument which maintains that 
high wages are never the result of duties, but always and 
invariably of greater effectiveness of labor — a not infrequent 
answer by the free traders to the protectionist contention. 

To this it must be replied that high wages in the United 
States, at present, are not in all cases the result of greater 
productiveness. If not caused by the tariff system alone, 
they are at the least dependent on it. They are the re- 
sult of the tariff system in this sense : as they are and where 
they are, they could not be paid but for that system. Many 
workmen — not so many as is often supposed, but still 
many — could not be paid in their present occupations what 
they now earn but for the barrier against foreign competi- 
tion. It does not follow that, if duties were removed, they 
could not get wages as high or higher in some other occu- 
pation; but, where they are, their present wages could not 
be paid but for the duties. 

When a system of protection has been established, it is 
not true, as we are often told by writers opposed to pro- 
tection, that high wages are an invariable sign of produc- 
tiveness, of great effectiveness of labor. In the United 
States we do have a great and dominant range of industries 
in which labor is effective, cost is low, commodities are pro- 
duced with less exertion than in other countries, and in which 
wages therefore are high. But side by side with these, the 
protective tariff has established industries in which labor is 



56 Free Trade, the Tariff and Reciprocity 

no more productive than in other countries. Chinaware of 
the finer grades supplies an example. If there were no duty 
on such ware, very little would be made in the United 
States, perhaps none. The employer who should try to make 
it could not afford to pay wages at the high rates set by 
other more effective industries. It would be imported, and 
would be paid for by the exportation of commodities for 
which our conditions are more favorable. But so far as the 
individual employer and workman are concerned, the duties 
on chinaware serve to offset the lack of favorable conditions. 
The duties enable the ware to be sold for more here than 
it will bring abroad; it can sell in this country for the for- 
eign price plus the duty. The employer is put in the same 
position as if his labor were more effective than the foreign 
labor. The tariff enables him to get more money for his 
product than the foreign employer gets for the product of 
the same labor abroad; therefore he can pay higher wages 
-than are paid abroad. And he must pay them. The stand- 
ard is set by farmer and steel-maker and implement manu- 
facturer, who get a larger gross return per unit of labor than 
their foreign competitors, and will under any conditions pay 
higher wages. The manufacturer who is dependent on pro- 
tection must pay as much ; and he is enabled to pay as much, 
even though his men produce no more in quantity or quality 
than those of his foreign competitors, because the duties 
make it possible for him to sell identically the same product 
at a higher price than prevails abroad. 

But the staunch protectionist will ask: Given the situa- 
tion as it now stands and must be dealt with now, is there 
any other possible way in which the wages of these men 
can be kept high ? And not only of these men, but of all 
workmen in all fields of industry? Suppose the duties re- 
moved, the chinaware industry wiped out, a quantity of other 
industries to meet the same fate, workmen to rush into those 
more productive or effective industries which free traders 






Row the Tariff Affects Wages 57 

extol — what then? Will not the competition of the added 
numbers bring down wages all around, and will it not appear 
that wages everywhere will be lowered under free trade? 
Can they be kept at their present high rates without the aid 
of protection ? 

To these questions the free trader has his answer ready. 
Yet there are problems and possibilities which compel the 
unbiased inquirer to pause, and to reflect carefully before 
giving an unqualified opinion or offering unqualified advice. 

It can be reasoned, as the free trader will reason, that, 
if the protective tariff be abolished, the men freed from the 
protected industries will ultimately find their way into the 
others not dependent on protection, and will there be em- 
ployed at the same high wages that now obtain — nay, at 
wages probably higher. These industries will expand; and 
the market for their expanding output will be found abroad. 
An extension of international division of labor will take 
place. Things formerly made at home will be imported, 
while other things, which the foreigners formerly made for 
themselves, will be supplied to them from our exports. The 
result will be in the end that we and the foreigners alike gain. 
Each set of people will produce the things which it can pro- 
duce to best advantage, and each will be better off by utiliz- 
ing the best services of the other. All this is but a restate- 
ment of the proposition that international trade depends on 
differences in the productiveness of industry, and largely 
on differences that are comparative rather than absolute. 
The material prosperity of the United States is increased 
if we confine our labor and capital to the commodities in 
which we have an advantage and in which our employers 
can afford to pay high wages. The most effective way to get 
those things in which our productiveness is no greater than 
that of foreign countries is to import them, and to export in 
exchange those things in which our productiveness is greater. 

The reasoning is beyond attack, granting its assumptions. 



58 



Free Trade, the Tariff and Reciprocity 



But it assumes, in a country which has long maintained a 
protective system and in which there are many industries 
dependent on that system, a great shift and an expensive 
transformation. No doubt the shift in the United States 
even with the sudden adoption of complete free trade, would 
not be as vast as the protectionists commonly state or imply. 
Their version of the consequences is that every single manu- 
facturing plant would have to be given up — not to mention 
the even more dire prophecy that all industries of every kind 
whatever would crumble in universal ruin. Just how many 
industries would succumb, no one can say; but I am con- 
vinced that they would form a minority among the manu- 
facturing industries themselves. Our manufacturing indus- 
tries are not in general such bottle-fed weaklings as their 
ardent supporters allege. None the less, the change would 
be absolutely large. There would be shut-downs, attempts 
to meet the situation by lowering wages, strikes, slow trans- 
fer of laborers to other regions and other industries, business 
failures, empty mills and villages, a trying readjustment 
of prices and probably of the general scale of money wages, 
hard times and uncertain employment. A considerable pe- 
riod of transition would have to be gone through before the 
new and better alignment of industry was finally reached. 
Ihose whose present commitments and investments have 
been made m business ventures dependent on protection 
could not be expected to do otherwise than oppose the chamre 
with might and mam; oppose it too with the firm conviction 
that right and justice, as well as the need of maintaining 
general prosperity, were on their side. 

Further: that expansion of exports which the free trader 
expects, and which he rightly regards as the complement of 
expanding imports, will not take place by an easy or rapid 
process. The ills which the protectionist predicts will ap- 
pear at once and conspicuously; whereas the predicted gains 
on the other side will appear so slowly as to be recognized 



How the Tariff Affects Wages 59 

only after a considerable interval. True, imports are paid 
for by exports, and cannot long continue unless so paid for. 
But there is no automatic connection. Each transaction in 
import trade and in export trade stands by itself, as Ricardo 
long ago remarked. Exports will grow only when they be- 
come profitable in consequence of the relation between prices 
of particular articles in this country and in foreign countries, 
and this relation will not be immediately changed. The 
economist may discern in the troublous period of transition 
the trend toward a developed and presumably more beneficial 
state of international exchange. But the average man will 
see only hard times and business troubles. The case is but 
one of many — the introduction of new processes and im- 
provements is of the same sort — in which the immediate 
effect of a general economic change is unsettlement and de- 
pression. The ultimate good result, when it comes, is ac- 
cepted as a matter of course, with no attention to the causes 
which brought it about. It is in this way that we accept 
unfettered free trade throughout the length and breadth of 
the United States, rarely stopping to think what far-reaohing 
consequences it has for our material prosperity. 

So great are the difficulties of an abrupt shift from one 
industrial policy to another — the real ones, not the imagi- 
nary ones of universal collapse and perpetual ruin — that 
no country, it can be safely predicted, will ever adopt such 
a ruthless procedure. If a change takes place, it will be by 
slow and gradual steps; and the first steps will be for a 
short start in a new direction, not at the moment of much 
consequence. Meanwhile, the bulk of the established indus- 
tries will be safeguarded. And within the range of the 
industries thus protected it will remain true that wages can 
be kept high only so long as the protection is maintained. 
And since most persons jump from a single thing which 
they see to sweeping generalizations, their conclusion will be 
that the tariff keeps all wages high. 



60 Free Trade, the Tariff and Reciprocity 

There is still another case which leads to the same sort 
of unwarranted generalization. The drift of the preceding 
reasoning is that, where the productiveness of a country's 
industries at large causes its rate of wages to be high, that 
high rate will be transmitted to the protected industries which 
could not otherwise afford them; while yet in the long run 
no workmen anywhere are really benefited by protection. 
But there are conditions under which protection may bring 
substantial and permanent advantage to some workmen, not 
only in the sense of keeping their wages up to the general 
level, but in that of lifting them higher. These are con- 
ditions of labor monopoly. A tight union of highly skilled 
workmen can get wages above the average, if it can not only 
keep the union closed within the country, but obtain legisla- 
tion for keeping out foreign workmen and the products made 
by foreign workmen. Apparently this was achieved, for 
example, for a considerable time by the glass-blowers ; and 
in olden days, for a shorter period, by the iron-puddlers. 
In both cases the exceptional advantage was wiped out, as 
such advantages usually are, by new processes which dis- 
pensed with the urgent need for the special skill. But the 
advantage lasted during the period of limited labor-supply 
and favoring industrial demand; and the tradition lasted 
long after the golden era itself. 

The trade-union spirit of selfish exclusion fits perfectly 
into the general scheme of protectionism; just as does the 
employers' spirit of combination and monopoly. It is rare 
that either kind of combination succeeds in maintaining 
high gains permanently — either high wages or high profits ; 
at all events, experience proves that a tariff barrier will not 
avail, unless other and stronger forces are behind. And it 
is to be borne in mind that the chances of effective monopoly 
are better for the capitalists than for the workmen ; because 
the general trend of modern industry to large-scale operations 
works that way, whereas the general trend toward equalized 



How the Tariff Affects Wages 61 

opportunities among laborers works to prevent even the high- 
est trade union from holding a privileged position indefi- 
nitely. Nevertheless, rare and insecure as are the conditions 
under which anything like monopoly wages can be secured by 
any set of workmen, the possibility and the occasional reali- 
zation strengthen the tradition that a high tariff leads to 
high wages. 

Most persons, and virtually all spokesmen of the organ- 
ized workmen, see only one outstanding thing at a time, 
and generalize therefrom at once. To them it seems axio- 
matic that any conditions which increase the wages, even 
of the smallest group, keep up the wages of all. The well- 
to-do and educated are entitled to no absolution on this score ; 
they are perpetually and naively urging fallacies or half- 
truths to justify this or that arrangement profitable to a 
knot of their own people. 

But when all is said, every qualification made, every excep- 
tion granted, the fundamental proposition remains intact. 
The general rate of wages in a country is not made high by 
protection, and is not kept high by protection. I will quote 
what I have said elsewhere : 

In current discussions on the tariff and wages, it has often been 
alleged that in one industry or another the efficiency or skill of 
the workmen is no greater in the United States than in England 
or Germany; that the tools and machines are no better, the raw 
materials no cheaper. How then, it is asked, can the Americans 
get higher wages unless protected against the competition of the 
Europeans? But it may be asked in turn, suppose all the Ameri- 
cans were not a whit more skillful and productive than the Euro- 
peans — perhaps quite as skillful, but not more so; suppose the 
plane of effectiveness to be precisely the same throughout the realm 
of industry in the countries compared; how could wages be higher 
in the United States? The source of all the income of a com- 
munity obviously is in the output of its industry. If its industry 
is no more effective, if its labor produces no more, than in another 
community, how can its material prosperity be greater and how 
can wages be higher ? A high general rate of real wages could not 



62 Free Trade, the Tariff and Reciprocity 

possibly be maintained unless there were in its industries at large 
a high general productiveness. 2 



in 

The general and dominant productiveness of American in- 
dustry — how comes it about and in what directions is it 
likely to be found ? A full answer would carry far beyond 
the limits of the protective controversy proper — limits which 
unfortunately are often passed in popular debate on this sub- 
ject, which strays into any and every phase of economic in- 
quiry. On the causes of varying effectiveness in industry 
much might be said ; but the essentials can be stated briefly. 

Those who reflect at all on the fundamental causes of gen- 
eral productiveness would probably emphasize two : more fer- 
tile land and more efficient labor. Both tell ; yet others tell 
also, and are frequently ignored. 

True it is that American agriculture long was the main- 
stay of our prosperity ; on the whole it is so still. True also 
that we are blessed with great stretches of fertile land in a 
temperate zone. But the natural resources alone do not ex- 
plain our favored position among the nations. That position 
is due no less to the intelligence with which the American 
farmer has learned to adapt methods of cultivation in such 
ways as to get the best yield from the plenty of good land. 
And he has been powerfully aided by the inventors and busi- 
ness men who have supplied him with agricultural machinery 
unique in its excellence, and by the railroad promoters and 
builders who have provided a transportation system which, as 
regards long-distance hauls, is also unique in its excellence. 
The American farmer is able to raise and to bring to market 

2 Some Aspects of the Tariff Question. In the chapter from which 
this passage is quoted, I have considered more in detail the causes of 
differences in industrial effectiveness between different countries; and 
in the volume at large have taken up the causes in specific American in- 
dustries (sugar, iron and steel, textiles). 



How the Tariff Affects Wages 63 

more wheat per unit of labor applied than his European com- 
petitor, not only because he has abundance of good land, but 
also because he works more intelligently, uses more and better 
machinery, takes better advantage of the plenty of land, and 
gets his wheat to market more cheaply. 

And — to turn to an analogous case — the copper-miner 
of the United States produces more copper per unit of labor 
applied than the miner of Europe or South America, not 
merely because the deposits of copper ore are richer, but 
also and mainly because the mining methods are better, the 
machinery more perfected, the transportation of ore and ma- 
terials cheaper, the dressing and smelting and refining proc- 
esses more advanced, all the advantages of large-scale opera- 
tions better utilized. Invention, ingenuity, enterprise, man- 
agement, are of a higher stamp than in competing countries. 
The human factor counts immensely in agriculture and min- 
ing, as well as in manufacturing industries. And it counts 
in the whole complex of operations : in the work of the farmer 
who plows and the miner who digs, as well as in that of the 
engineer, the inventor, the business man. 

The reader may have observed that in preceding para- 
graphs I have spoken, not of the " efficiency " of labor, but of 
its " effectiveness." Efficiency, as the word is commonly 
used, implies greater output by the individual workman, 
alone and by virtue of his special excellence — greater physi- 
cal vigor, better intelligence, better use of tools. Now in this 
regard the American of native stock does excel; the first 
native-born of foreign stock usually does ; even the immigrant 
may, under the influence of example and environment. Most 
important, however, is what may be called, for want of a 
better term, the general effectiveness of industry — the ac- 
cumulated result of all the factors that unite in making a 
people's work yield a given physical output. And among 
those factors a commanding place must be assigned to direc- 
tion and management — to the business leaders. The busi- 



64: Free Trade, the Tariff and Reciprocity 

ness men of America who " make " clocks and watches, boots 
and shoes, furniture and building hardware, steel in its semi- 
finished and more advanced shapes, tools and machines of all 
sorts — to specify some striking cases — turn out from their 
establishments, with the same capital and labor, more than 
the foreigners do; and this not solely, or even primarily, be- 
cause their workmen are stronger or steadier or more skillful, 
but because of superior management. 

When we try to define, not the physical causes of effect- 
iveness, but those that rest on the character and genius of a 
people, precision is impossible. The characteristics that 
most pervade a people are often the most difficult to explain. 
Those of the Americans go with the spirit of democracy, the 
universal tradition of a free career for every talent, concep- 
tions of large possibilities that correspond to the large scale 
of the country, the ubiquitous and restless energy in money- 
making — elements both good and bad. Business schemes, 
business ambition, business leadership, have played a larger 
part in our social and political development than in that of 
any other country. Only in Great Britain is to be seen any- 
thing comparable. And this has led to a general effective- 
ness of industry, not only wherever natural resources have 
been abundant, but often where there has been no such favor- 
ing foundation. The national genius has led to a high level 
of productive capacity over a wide range of mechanical in- 
dustries. By far the greater part of what are classed as 
manufacturing industries have an inherent strength. They 
are able to pay the American rate of wages, not because they 
are bolstered up by the tariff, but because their output per 
unit of labor is large. They are among the strong and self- 
sufficing industries, not among the less effective which are 
upheld by those that dominate. 

It is in the large-scale, standardized manufacturing indus- 
tries that this strong position is most often found. Any one 
who looks through tariff demands and debates will be struck 



How the . Tariff Affects Wages 65 

by the fact that competing foreign products are likely to be 
specialties or handicraft articles. Where a thing is turned 
out in great quantities, all of a single pattern, the American 
producer is almost sure to hold his own. Sewing-machines, 
for example, are made in the United States by the thousand 
and hundred thousand, and are exported in great quantities 
to all parts of the world. Yet certain special types, of which 
a very few are in demand for unusual bits of stitching, are 
imported. Since only those few can be sold in any case, the 
American manufacturer does not find it worth while to set up 
the apparatus of molds, patterns, machines, systematized con- 
tinuous output, which he organizes for the standard types. 
The European maker is willing to take orders for a few 
pieces, and makes the specialized machines by using a much 
larger proportion of handicraft-labor. 

Again, table-knives are standardized, innumerable dozens 
being made of each pattern ; pocket-knives, on the other hand, 
are of infinitely diverse patterns, no one marketable in great 
quantities. Hence table-knives are made in the United 
States unhindered by foreign competition; whereas pocket- 
knives have been steadily imported in face of high duties. 
Among textiles, the more ornate and expensive fabrics are 
commonly imported. Not many yards of any one such fabric 
can be sold ; the American producer does not find its produc- 
tion worth while. But where there is mass production of an 
enormous yardage, he takes hold with success. His success 
is most conspicuous in the great range of ordinary cotton 
fabrics, easily marketed by millions of yards, and made as 
cheaply in this country as anywhere in the world. 

It would give a false picture to sketch in these broad terms 
the general traits of American industry without calling at- 
tention also to the exceptions. Often the success of a given 
establishment, or even of an industry, is due to that elusive 
element, the personality of an individual. An Englishman 
may devise a system of highly standardized production for 



66 Free Trade, the Tariff and Reciprocity 

a given article. An American may have a bent, perhaps an 
artistic gift, for a specialty. Sometimes the division of the 
market between domestic and foreign producers is quite in- 
explicable on any general grounds; it seems to be a matter 
of tradition or accident or mere inertia. Idiosyncrasies of 
this kind are as common as the departures from the standard 
type which the biologist finds in the living world. Probably 
not a single generalization in economics can be laid down to 
which there are not significant exceptions. And yet the 
general propositions remain the significant ones. For the 
present purpose these are: that our country's high rate of 
wages rests on a high general effectiveness of industry; that 
effectiveness is not merely a matter of natural resources or 
physical causation, but is largely the product of national 
spirit, temper, adaptiveness ; and that it appears over a wide 
range of manufacturing industries, in which the key-notes 
are labor-saving devices, the utmost use of elaborated ma- 
chinery, large-scale operations, mass production. 



IV 



Finally, a word must be said in criticism of an argument 
with which the free trader sometimes meets his opponent 
He compares the wages paid in protected industries with 
those paid in industries not protected. In the former class 
conspicuous cases are adduced of wages below the general 
range and below the rates in non-protected industries; there- 
tore, the free trader reasons, protection cannot be said to 
have any effect in keeping wages up. tf ay, it is sometimes 
argued that protection is thus proved actually to bring them 
down. Some years ago, when there was a great strike in 
Lawrence, Massachusetts, figures were cited to show that the 
operatives m the woolen mills got wages unusually low. 
±lere, said the opponents of protection, is an industry which 
notoriously has the advantage of high duties and yet pays 



How the Tariff Affects Wages 67 

its employees wretched wages. How can it be maintained 
that protection benefits the workingman? 

On this issue judgment must be given for the protection- 
ist. The free trader perhaps is fairly justified in using this 
sort of fetching rejoinder as a tit-for-tat to the harping on 
tariff and wages which constitutes the campaign ammunition 
of the other side: he may be entitled to fight the devil with 
fire. But the impartial judge must rule that the facts are 
misinterpreted, the inferences not warranted. In any coun- 
try, whatever the tariff system, and whether the general level 
of wages be high or low, some workmen will earn more than 
the average and some less. Differences in education and 
training, in skill, intelligence, and character, will always 
cause divergences from the general scale. The range is great 
from the common laborer to the highly skilled mechanic. 
Tariff legislation has as little to do with fostering or checking 
these divergences as currency legislation or railroad legisla- 
tion. Far more significant in its bearing on these matters 
is the course of legislative policy on immigration, and even 
more important is the education of the masses. 

It may indeed be alleged that the protected industries em- 
ploy the lower grades of labor in unusually large proportions. 
Some of them do so — as for example the silk and woolen 
manufacturers. But other industries not dependent on pro- 
tection do so also, such as iron- and steel-making, formerly a 
child of protection, but now quite grown out of tutelage, and 
the meat-packing trade, never under tutelage at all. Ameri- 
can business leaders have shown singular adaptiveness in 
utilizing any and all resources at their disposal, both the 
natural and the human. They have directed the skilled me- 
chanics to the construction and operation and repair of the 
most complex machinery ; they have directed the drudges sup- 
plied by immigration to monotonous but effective mass-pro- 
duction. But there is no clear evidence that the employment 
of the one class or the other, or the relative rates of pay, have 



68 Free Trade, the Tariff and Reciprocity 

been modified by the country's protective policy. Through it 
all, the wages of the lowest stratum have been higher in the 
United States than in foreign countries; and so have those 
of the upper strata. The difference in favor of the American 
workmen has not indeed been on the same scale throughout. 
The skilled mechanic has enjoyed, at least during the last 
generation, a larger differential than the pick-and-shovel man. 
But this special advantage has appeared quite as much in the 
industries not dependent on protection as in those that 
are dependent. It is due to general social causes quite dif- 
ferent from those that bear on the tariff problems. 

It is possible, nay probable, that in the next generation 
marked changes will take place in this part of the social 
structure. The supply of human cattle will be much 
abridged by the application of the illiteracy test to immi- 
grants, conceivably by the future application of tests even 
more narrowly selective. Further, the tendency of democ- 
racy and of universal education is toward lessening the 
stratification of labor; and that tendency will be no longer 
counteracted, as it has been in recent decades, by a steady 
congestion in the lowest stratum through immigration. A 
most desirable and welcome smoothing of the differences will 
gradually result, opposed by the employers, opposed also and 
bitterly resented by the semi-aristocratic crafts, yet not to be 
resisted. It may not take the form of a lowering of the 
craft wages; possibly these will simply remain stationary, 
while those of the unskilled gradually rise ; but some smooth- 
ing away of the differences may be expected. 

The development of American manufacturing industries 
may be much influenced by this social change. The indus- 
tries which had been planned and organized on the basis of 
being able to draw cheap common labor from a vast reservoir 
will find conditions less propitious than before. Both pro- 
tected and non-protected industries will have to adjust them- 
selves to altered conditions. But it would be hard to say 



How the Tariff Affects Wages 69 

that the adjustment will be greater or more difficult in one set 
than in the other. Important though the new situation will 
be for our social and political problems, it is not likely to 
bring consequences significant for the protective controversy. 
To return to the main question : it is reduced again to its 
simplest elements. Wages at large, and the prosperity of 
the laboring class as a whole and so of the country as a whole, 
are not kept high by protection. True, in those branches of 
industry which are really dependent on the tariff, the work- 
men there engaged could not there remain, at the current 
high wages, if the tariff barrier were to be removed. True, 
also, a transfer of labor and capital to other industries not 
dependent on the tariff could take place only with great diffi- 
culty and great hardship; and here are problems which the 
free trader cannot lightly dismiss. But none the less it is un- 
true that high wages in general have been caused by protec- 
tion, or are now made possible only by protection. They rest 
not on that feeble prop, but on the solid foundation of general 
effectiveness of industry — on the resources of the country 
and the genius of the people. 



IV 

WAGES AND PEICES IN RELATION TO INTER- 
NATIONAL TRADE » 

The main thesis of the present paper is that in considering 
the working of international trade, attention should be paid 
more to the range of money incomes, and less to the range 
of prices than is usually the case when economists take up 
this set of topics; and that in gauging the advantages which a 
country secures from international trade, we should look 
primarily to the range and the variations of money incomes. 

It is usually set forth that the country where prices are 
highest gains most from international trade, and the coun- 
try where prices are lowest gains least. The range of prices 
obviously enough is not in itself of consequence. High prices 
simply mean the use of more counters in exchange. But in 
buying imported commodities those whose domestic transac- 
tions are carried on with many counters have an advantage. 
Foreign goods are not so high in price, and are procured 
more easily. Conversely, countries with low prices are ill 
off as regards imported goods, which are bought on hard terms 
by people whose scale of money prices is low. 

This statement of the case would be open to no exception 
if the words " money incomes " were used throughout when 
stating the situation of the people of a given country. It is 
high money incomes that are of consequence in international 
trade, not high prices. In fact, a country may have, not high 

i Quarterly Journal of Economics, August, 1906. This paper is ad- 
dressed more than any other in the present volume, to those conversant 
wUh the refinements of the theory of international trade. The general 
reader may prefer to pass it by. e 

70 



Wages and Prices 71 

prices, but low prices, and still be in an advantageous posi- 
tion as regards international trade. High money incomes do 
not necessarily or commonly mean high prices. It is by a 
consideration of the relation between money incomes and 
prices, of the possibilities of divergence or parallelism be- 
tween them, that some contribution may perhaps be made 
toward better understanding the phenomena. 

Let us consider, for this purpose, a country in which wages 
and other money incomes are high. The United States, for 
example, has a high range of money incomes. It is com- 
monly thought to have also high prices. Let us compare its 
situation with that of the European countries with which it 
trades, and ascertain wherein it gains, and how far its gains 
are connected with the prices of goods and the money rates 
of wages and other incomes. For the sake of simplicity, in 
speaking of the United States or similar countries, I shall use 
indifferently the terms " money wages " and " money in- 
comes/' leaving it to be understood that not wages only, but 
other money incomes as well — rents, profits, interest, the 
earnings of independent farmers or artisans — tend to be cor- 
respondingly high. 

Begin by recalling some of the familiar principles of inter- 
national trade. Under a state of freedom, goods that are 
imported and exported will sell at approximately the same 
prices the world over. There will of course be differences 
from cost of transportation. Imported goods will sell at 
prices higher than their prices in the exporting countries by 
the amount of cost of carriage. Sometimes a commodity 
that newly enters into foreign trade — one that a shrewd 
merchant discovers to be cheap in one country and salable 
in another — will sell in the importing country at a large 
advance ; and doubtless the action of competition in leveling 
profits and reducing such differences of prices to the " nor- 
mal " point is not so quick and thorough as the economists 
are disposed to believe. But on the whole we may reason on 



72 Free Trade, the Tariff and Reciprocity 

the assumption that under conditions of freedom those com- 
modities which enter into international trade have a com- 
mon price the world over. The extraordinary cheapening of 
transportation during the last half -century, the easy transmis- 
sion of news, the perfected organization of markets and ex- 
changes, contribute to make this assumption a safe one for 
all the great staples. Customs duties, of course, are an im- 
portant cause of differences in price ; of these something more 
will be said presently. But the fundamental principles can 
be best elucidated by tracing their operation under free trade. 
Every country will export those things which are cheap in 
its borders — whose prices are so low that they can be shipped 
to foreign countries and still sold at the advance needed to 
cover cost of carriage. And those things will usually be 
cheap which are produced with a comparatively small amount 
of labor. — those in which the effectiveness of labor is great. 
A country with high money wages, like the United States, can 
yet put goods on the market (whether the domestic market 
or the foreign) at low prices, if its labor is productive. Such 
is the familiar situation with our great agricultural staples. 
The money incomes of those who grow wheat in the United 
States, whether the earnings of the independent farmers or 
the wages of the laborers whom they hire, are larger than the 
incomes and wages of wheat-growers in other countries. But 
the wheat can none the less be sold at a low price in the 
United States, and can be exported from the United States, 
because our labor is effective in producing it. Why the 
labor is effective is no part of the present inquiry. One 
cause clearly is the abundance of fertile land; a cause no less 
important is the wide-spread intelligent use of good agricul- 
tural machines. These very agricultural machines — to men- 
tion another commodity — are largely exported from the 
United States, though the wages of the workmen who fashion 
them are high; because the methods of making them have 
been greatly perfected. To specify still another case, the 



}Yages and Prices 73 

earnings of the negroes who grow cotton in our Southern 
States, low as they may be when measured by ordinary Amer- 
ican standards, are higher than those of the fellaheen in 
Egypt or the ryot in India. Yet American cotton can be 
sold as cheaply as that of Egypt or India. The soil and cli- 
mate make the Southern negro's labor effective, and doubt- 
less in some degree a better organization and direction of his 
labor contribute also to make it so. 

All this is but a restatement of the principle that a coun- 
try will export those things in which it has a comparative ad- 
vantage. The exposition of that principle, as it is usually 
found in the books on economics, would be simpler and more 
telling if it were made clear (the common form of statement 
fails to make it so) that the things in which a country has a 
" comparative advantage " are those which are likely to be 
low in price. International trade, like all trade, though 
fundamentally a matter of barter, is proximately a matter of 
price. A country sells abroad those things which it can 
produce at low prices at home. Ordinarily, those things are 
produced at low prices at home in which the country's labor 
is effective. 

Proceed now to the next stage : what will be the range of 
prices for those commodities which do not enter into the 
sphere of international trade — those which are not exported 
or imported, but are bought and sold solely within the coun- 
try ? The quantity of such commodities is very great, and 
in all countries probably much exceeds that of commodities 
having a world range of prices. Many things are too bulky 
to be transported over any considerable distance — as stone, 
bricks, timber. Many are perishable, as milk, butter,^ eggs, 
fruits, vegetables. No doubt modern improvements in the 
transportation of bulky goods and in the preservation of those 
that are perishable tend to enlarge the sphere of foreign trade. 
But such things are still sold mainly in their own region and 
at the prices of their own region. House-room and shelter, 



74 Free Trade, the Tariff and Reciprocity 

a most important article of consumption and purchase, can- 
not be transported at all, and so may vary widely in price in 
different countries. Some of the articles used in building 
houses — boards and laths, doors and windows, locks and 
hinges — may indeed be sent to distant regions. But even 
these are much affected by the customs and fashions of the 
several countries, and are usually made and sold on the spot 
or near it. A multitude of articles which might conceivably 
be brought from foreign countries are in fact made chiefly 
at home, because of the persistent sway of habit and tradition. 
Such are clothing and boots, tools and machines, wagons and 
harness. The reader's imagination will easily enlarge the 
list. The prices of all these things are determined under 
domestic conditions. They do not enter into international 
trade, and have no world level of prices. 

Most persons would say that the prices of such commodities 

— it will be convenient to speak of them as " domestic com- 
modities " — will be high |n countries where money incomes 
are high and low in those where money incomes are low\ 
But this by no means follows. The range of domestic prices 
in a country, as compared with the range of prices of the same 
things in other countries, depends on the effectiveness of labor 
in producing the domestic commodities. 

Looking at the United States as our example, we find some 
things higher in price than in European countries, some 
things lower. We know, of course, that the exported articles 

— wheat, corn, flour, meats, cotton, iron, copper — are as 
cheap, even somewhat cheaper. But how about domestic 
commodities? Some are dearer, some are cheaper. Com- 
parison is often- difficult, because the qualities of things vary; 
but every-day observation suffices to establish significant dif- 
ferences. Wheat and flour are cheaper, yet bread from the 
bake-shop is dearer. Most fruits are as cheap or cheaper in 
the United States, especially when they have been transported 
some distance. In the immediate region of fruit-growing, 



Wages and Prices 75 

fruits are often cheaper in Europe. Eggs are dearer in the 
United States. Milk and butter are usually dearer also. 
Bituminous coal is, in most parts of the United States, as 
cheap or cheaper. Anthracite coal is dear ; but comparison 
with a corresponding article in European countries is not 
easy. The simpler kinds of cotton clothing are cheaper. 
Boots and shoes are as cheap, probably cheaper. Woolen 
clothing is dearer. Here the effect of the duties on wool 
must be reckoned with; but ready-made woolen clothing is 
not so high in price as that made to order. Household furni- 
ture is cheaper ; hardware and kitchen utensils are probably 
also cheaper when due allowance is made for quality. All 
things that involve personal service — cab fares, hotel charges, 
servants' wages — are markedly higher in price. 

An interesting case, and one that serves to bring out both 
the difficulties of comparison and the working of the under- 
lying forces, is that of house-room. The amount that is actu- 
ally paid out for house rent is, scale for scale in the social 
stratification, higher in the United States. But in most 
cases more is got for the money. The space is ampler, the 
lighting better, the appurtenances more convenient. Per- 
sons of the well-to-do class who spend a season in Europe 
will commonly pay less for house rent than they would ex- 
pect to pay in the United States, but they are commonly 
content with less agreeable and convenient accommodations. 
A significant difference is observable between houses made 
chiefly of wood and those built of brick and stone. Masonry 
work is dearer in the United States ; wood work is as cheap 
or cheaper. Houses of brick or stone cost more to build than 
in Europe ; if built of wood, they cost less. The explanation 
is that machinery can be applied to manipulating wood more 
easily than to brick or stone. Given the same efficiency of 
labor, the same output per day per man, and it is evident 
that if you pay higher wages you must charge higher prices. 
Such in the main is the case with brick and masonry work 



76 



Free Trade, the Tariff and Reciprocity 



in the United States as compared with Europe. Brickmak- 
ing and bricklaying, stone-cutting and masonry, are done 
chiefly by manual and artisan labor, even though in brick- 
making and in stone-cutting there is probably in the United 
States somewhat greater use of power and machinery than in 
Europe. Wages being higher, and the output of labor no 
greater, prices must be higher. Wood working, on the other 
hand, from the rough-sawn timber to the last molding on the 
door or windows, is done in the United States with a great 
use of machinery; and, what is most significant, with a 
greater use of machinery and labor-saving devices than in any 
other country. Labor is thus made more effective, and, 
though more highly paid, its product is not necessarily sold 
at a higher price. Given a sufficient advantage, and the pro- 
duct will even be cheaper. If the work on your wooden house 
is all done on the spot by carpenters, it will be dearer in the 
United States ; but, if the carpenters simply put together in 
short order the machine-made pieces from the saw-mill and 
factory, it will be cheaper in the United States. The last- 
named is the way in which the great majority of houses are 
built in the United States for persons of small means or 
moderate means ; and such houses are as cheap as in Europe 
or cheaper, and the house rent for them, quality and con- 
venience considered, is as low or lower. 

This explanation of the range of house rents applies, 
strictly speaking, only to the selling price, or capital value, of 
the building and improvements. The rental is compounded 
of a return on this investment and of premium for the ad- 
vantage of the site, namely, economic rent proper. The first 
of these items, interest on capital, is affected by causes very 
different from those that govern prices and wages. The rate 
of interest may be high where money wages are low, and low 
where wages are high. In fact, however, the variations in 
the rate of interest among civilized countries are not so great 
that we have here an important qualification of our conclu- 



Wages and Prices 77 

sions as to the causes acting on the price of house-room. Dif- 
ferences in the cost of building will affect this part of the 
rental much more than differences in the rate of interest. 
As to economic rent, the case is simpler : this return may be 
expected to vary pari passu with money incomes. To apply 
the familiar theorem, rent is the result of price, and not 
among the causes of price. Where the general range of 
wages and of incomes is high, the amount that will be paid 
for an advantageous or indispensable site will be correspond- 
ingly high. Hence, looking at all the elements of the case, 
we are prepared to learn that the rents of tenements in New 
York City are high. The investment in them is heavy. 
Their brick work is done by highly paid artisans, with little 
use of labor-saving machinery. A crowded population, with 
a high range of money incomes, causes economic rent to rise 
to portentous heights. In smaller cities and in the suburbs 
of most larger cities, on the other hand, modest wooden 
houses for artisans are cheap. Economic rent enters little, 
and the cost of building is comparatively low. 

Similar reasoning can be applied to the rental of business 
structures. The modern steel-frame office building in the 
United States probably costs less per unit of available space 
than similar buildings in Europe. The brick or stone busi- 
ness structure of the older type probably costs more. The 
total rental is a compound of interest and economic rent, the 
latter exercising a preponderant influence on those sites where 
there is demand for the enormous amount of floor space pro- 
vided in the huge office building. 

Ordinary pick-and-shovel work costs more in the United 
States: sewer-digging, street-making, the grading of a rail- 
way. Wages are higher, and, man for man, no more is ac- 
complished or little more. It is, indeed, often said that the 
efficiency of common labor is greater in the countries of 
higher wages: the laborer, getting more food, can do more 
work. There is doubtless truth in the assertion, when com- 



78 Free Trade, the Tariff and Reciprocity 

parison is made between the wages and the output of laborers 
in starvation countries, like British India, and the wages 
and output of countries where life is less cheap. But I have 
always been doubtful as to the sweeping applicability of this 
sort of reasoning. The rice-fed Chinaman or Japanese seems 
to do as much in a day as the beefy Englishman ; the frugal 
Italian as much as the extravagant Irishman. On the whole 
we may expect the product of ordinary manual labor to cost 
more (in money) in a country like the United States. No 
doubt much work that seems to be solely of this kind is af- 
fected by the degree and extent to which machinery and 
labor-saving devices are used. The familiar apparatus of 
sewer-construction in the United States is vastly superior to 
anything of the sort in common use on the continent of 
Europe. The same is true of the railway contractor's outfit. 
So far as the American engineer and contractor can secure by 
such means greater results, the high money wages do not 
entail high expenses and high prices. 

Kailway freight rates are on the whole lower in the United 
States. That they should be lower or as low, notwithstand- 
ing the higher wages of all railway employees, is clear proof 
that the efficiency of railway operation in the United States 
is greater than in Europe. The lower rates for freight and 
the greater extension of facilities for long distance traffic go 
far, again, to explain the comparatively low prices of many 
commodities — fruits, coal, even bread-stuffs and meats. 
One great cause of the general effectiveness of labor in the 
United States and of the wide diffusion of material pros- 
perity has been the extraordinary development of the geo- 
graphical division of labor; and for this the widely ramifying 
railway net, and the extent and cheapness of railway service, 
have been indispensable. Street railway fares, to instance 
another curious case, are as low or lower in the United States. 
Even at the lower fares, they commonly yield large profits. 
The efficiency of labor must be very much greater. 



Wages and Prices 79 

Retail prices — that is, the spread between wholesale and 
retail prices — present a mixed case. If the operations of 
the retail dealers in the United States are conducted in the 
same way as in Europe, the advance of retail prices over 
wholesale must be greater. Otherwise the earnings of the 
retail dealer will not be on the same liberal scale as the wages 
and earnings of the rest of the community. But if the retail 
dealer's work is done, not in the same way as in Europe, 
but in a more effective way, he can reap sufficiently high 
gains with no larger margin of profit. Both situations seem 
to exist. The large department store in the United States is 
probably conducted with greater efficiency and with no 
greater advance of retail over wholesale prices than in Eu- 
ropean countries ; though the recent rapid growth of this sort 
of shop-keeping in Europe makes the difference less than it 
would have been ten or twenty years ago. On the other 
hand, a great deal of retailing — probably the greater part 
of the sum total of this sort of work — is still done on a small 
or modest scale. The grocer, butcher, apothecary, must usu- 
ally be near his customer. This means that the operations 
are scattered and are conducted on no large scale. In such 
case the advance of retail prices over wholesale — the retail- 
er's " profit " — is greater in the United States. Hence it 
may happen that an article whose wholesale price is lower in 
the United States and which is exported from the United 
States to Europe, may yet be dearer here to the retail pur- 
chaser. Expense of transporting the great staples across 
the ocean has been reduced to a very narrow margin, and 
the slight difference caused by this in wholesale prices may 
be more than balanced by the greater advance of retailer's 
prices in the country of higher money incomes. Butcher's 
meat may cost the consumer more in the United States, even 
though dressed beef be sent by the shipload across the 
Atlantic. 

Persons of the well-to-do classes find the expenses of living 



80 Free Trade, the Tariff and Reciprocity 

higher in the United States than in Europe; and to their 
mind there is no question that prices here are higher, and 
higher in proportion to the higher range of money incomes. 
The explanation is partly that much of their expenditure is 
for personal services; partly that another large fraction of 
it is for those articles, imported and other, which are really 
high in price; partly that a higher scale of comfort and 
luxury has been established by prevalent prosperity. The 
items that are most conspicuously dear in the United States 
and cheap in Europe are the various kinds of service - — do- 
mestics, cabs, hotels. Where the range of wages is high, 
these things are expensive. Wages for domestic service are 
particularly high in the United States, because the spirit of 
democracy makes the occupation distasteful. Again, the ex- 
penditure of prosperous Americans at home is directed in 
large degree to the less hackneyed and less common articles — 
to the hand-made things rather than the machine-made 
things. The hand-made things are dear in a country where 
money wages are high. Clothing made to order is dear, 
though ready-made clothing is by no means dear in the same 
degree. Factory-made furniture is cheap ; custom-made fur- 
niture is extremely dear. Cab fares are high ; street railway 
fares are low. Imported articles of course would be no 
higher in price than abroad, or very little higher, were they 
admitted duty free. Being subjected to heavy duties, they 
also are expensive. It is probable that the most effective part 
of our protective system is now directed against the articles 
made in larger proportion by hand with the tool, and in less 
proportion by power with machinery. These are the things 
most likely to be imported into the United States, and most 
enhanced in price by the protective duties. These are often, 
though by no means always, the commodities bought by the 
well-to-do; and thus there is ground for saying that the social 
effects of the protective system here are less objectionable 
than in countries that levy duties on the staples of life. 



Wages and Prices 81 

In sum, it can be said that the United States, though a 
country of high wages, is not a country of high prices for 
the great mass of the community. It is so in large degree 
for the rich and well-to-do. True, the artisans and working- 
men and farmers have a high scale of living, for they have 
plenty to spend; but the domestic articles they buy are on 
the whole not dear. They are not dear, because the effective- 
ness of labor in making them is not less than that of labor 
in making the exported articles. Imported articles which are 
duty free, like tea and coffee, are as cheap (barring cost of 
carriage) as in foreign countries; and here also the Ameri- 
can gets the full benefit of his higher money wages. So far 
as the protected articles are concerned, his advantage is 
simply thrown away. 

What has been said of the United States, the typical coun- 
try of high money wages, applies mutatis mutandis to coun- 
tries of low wages. In a country of low money wages do- 
mestic prices may or may not be low. Such a country is 
usually, though not necessarily, one with an all-around ineffi- 
ciency of labor. Those articles as to which its labor is least 
inefficient, and which are transportable or for other reasons 
salable abroad, will be exported. Though they may be turned 
out by ineffective labor, they can yet be sold at the interna- 
tional price because the money expenses of production are 
low. Domestic commodities — namely, such as are not ex- 
ported or imported — will be comparatively low or high in 
price, according as labor in producing them is effective or 
ineffective. The wages of servants and other like expenses of 
the well-to-do are sure to be low. 

Our next inquiry is, what causes high money wages ? The 
answer in brief is that those countries have high money 
wages whose labor is effective in producing exported com- 
modities, and whose exported commodities command a good 
price in the world's markets. The general range of money 



82 Free Trade, the Tariff and Reciprocity 

incomes depends fundamentally on the conditions of inter- 
national trade, and on those conditions only. The range of 
domestic prices then follows : it is high so far as the output 
of labor in domestic commodities is small, low so far as the 
output of labor in domestic commodities is great. 

The situation is simplest in the case — difficult to find in 
the real world, but instructive for illustration of the prin- 
ciple — of a country having a monopoly of a given article of 
export or set of exported articles. By monopoly, of course, 
is here meant not that the producers within the country fail 
to compete among themselves, but that the producers of no 
other country compete with them. The price of such ex- 
ported articles will depend, in the manner with which the 
reader may be supposed familiar, on the equation of interna- 
tional demand. The more the consumers in other countries 
care for them, the higher will their prices be pushed. The 
less the labor with which these articles are produced at home, 
the higher will be the money wages resulting from these high 
prices. The higher money wages in the exporting industries 
will set the standard for money wages in the country at 
large ; but the general high wages may or may not be accom- 
panied, as already explained, by high domestic prices. 

Where a country exports in competition with other coun- 
tries — the well-nigh universal case — the same forces are 
at work. The prices at which the exports are sold depend on 
the world demand for the commodity. In that world de- 
mand, or, to speak more carefully, interplay of demand, the 
extent to which the consumers in the several countries care 
for the articles imported into them determines which coun- 
tries shall sell their exports on advantageous terms, Those 
countries whose exports are in most urgent demand will have 
the greatest possibility of high money incomes. Whether 
that possibility will be realized — whether they will have 
high incomes, in fact — depends on the labor cost of their 
exports. The wheat which is exported by the United States 



Wages and Prices 83 

and by Eussia sells at the same price; but that price means 
large money returns in the country of machinery, efficient 
labor, and cheap internal transportation, and low money re- 
turns in the country which lacks these advantages. In the 
language of Mill, 2 " What a country's imports cost to her is a 
function of two variables : the quantity of her own commodi- 
ties which she gives for them, and the cost of those commodi- 
ties. Of these, the last alone depends on the efficiency of her 
labor: the first depends on the law of international values; 
that is, on the intensity and extensibility of the foreign de- 
mand for her commodities, compared with her demand for 
foreign commodities." 

Where a country produces and exports specie — gold, let 
us say — the case may seem to be different ; yet a little con- 
sideration will show that the forces at work are the same as 
in countries producing other articles of export. A gold min- 
ing country may or may not have a high level of domestic 
prices. Gold is indeed a commodity which always is readily 
taken by foreign countries. The demand for it is sometimes 
said to be limitless; more carefully stated, it is constant. 
All the gold produced will be taken, and will be distributed 
over the world among virtually all the trading countries, at 
rates of payment which will be very slightly modified by any 
annual or decennial increase in the quantity sent out from 
the mining countries. If now the gold is produced, and 
produced freely, with little labor — if it is cheap in that 
essential sense — the mining country will have high money 
incomes. Such was the case in California and Australia 
during the first days of the gold discoveries. Prices of all 
things were high in those days ; for in commodities at large 
labor was by no means productive. In a country where gold, 
though mined, is not produced under advantageous condi- 
tions — where the mines are poor or mining methods at a 
low stage — money wages will not be high ; and the gold will 

2 Mill, Principles of Political Economy, Book III, chap, xviii., § 9, 



84 Free Trade, the Tariff and Reciprocity 

not be mined at all unless it yields as large money incomes 
as other possible articles of export. 

In the case of a gold mining country we may note a quali- 
fication which indeed should be borne in mind for all coun- 
tries and for all commodities: it is to be assumed that the 
exporting industry does not partake of the character of a 
monopoly within the country. In the placer mining days of 
California and Australia any laborer with a pan and a stock 
of provisions could join in the hunt for gold, and high money 
wages were a matter of course. When more elaborate mining 
set in, high wages still continued, so long as the mining capi- 
talists competed among each other for laborers. But if some 
of the mines were highly productive and others much less so, 
the productivity of labor at the margin of mining would fix 
the range of money wages. There might be advantageous 
production and heavy exportation of specie, without a high 
range of wages, if the exports came predominantly from the 
better mines. And if the mines were all owned and operated 
by one person or organization, the greatest richness and pro- 
ductiveness need not result in high wages. All the treasures 
of Potosi, however little labor they cost the wretched native, 
never could bring him high returns, even in money. And 
similarly, if all the exporting industries of the United States 
were under such control as are the production and refining 
of petroleum, then the general range of money wages, however 
great the productiveness of labor and however strong the 
foreign demand for the articles, would not necessarily be high, 
and certainly would be less high than under conditions of 
unrestrained competition. 3 

3 The foundation for all such discussion as this was laid by Ricardo, 
whose genius nowhere shone so brilliantly as in his illumination of the 
theory of foreign trade. But Ricardo, so far as I know, referred only to 
general prices as being subject to variation between different countries. 
Senior seems first to have laid it down, explicitly that the range of 
money incomes depends on the conditions of foreign trade (Lectures on 
the Cost of Obtaining Money, 1830, pp. 13-16). Mill spoke sometimes 
of high prices, sometimes of high incomes, as the result of favorable 



Wages and Prices 85 

There is an important sense in winch it is true that a 
country whose position in international trade is advantageous 
has not only high money incomes, but high prices as well. 
In the preceding pages, domestic prices have been said to be 
high or low, if the prices of given commodities are higher 
or lower than the prices of the same commodities in other 
countries. Thus the price of a wagon may be spoken of as 
high or low in the United States if it is higher or lower than 
the price of the same sort of wagon in Europe. Similarly, 
railway and street railway fares and house rents may be 
reckoned low if they cost less money than similar things in 
Europe. But we may compare wagons and fares and rents, 
not with European rates, but with the prices of the same 
things at a different time and under different conditions in 
the United States. So considered, it is obvious that they are 
likely to vary with wages and money incomes. They will 
probably rise as money wages rise, and fall as money wages 
fall. 

If we suppose, for example, that the conditions of interna- 
tional demand change to the advantage of a given country, 
that its exports sell on better terms, and that money incomes 
in the exporting industries rise, we may expect that the same 
rise in money incomes will spread to other industries. This 

conditions of foreign trade, and did not pause in his exposition to con- 
sider the relation of money incomes and domestic prices. Cairnes fol- 
lowed Senior, though using different language, when he said that a 
country was interested in having " cheap gold " ; by which he clearly 
meant, though he did not say it in so many words, high money incomes 
— i i. e., much gold for little labor. Cairnes also noted that " cheap 
gold " did not necessarily mean high prices of domestic commodities. 
See his Leading Principles, Part III, chap v., § 1. In Bastable's 
Theory of International Trade, 4th edition, p. 71, there is a brief 
paragraph indicating that this able thinker had reflected on the com- 
plex relations of money incomes and prices. Professor Edgeworth's 
articles on International Trade in the Economic Journal, vol. iv., take 
up quite different aspects of the theory. I have found nothing in the 
writings of French or German economists to show that such topics had 
engaged their attention at all. 



86 Free Trade, the Tariff and Reciprocity 

will necessitate in those other industries a rise in prices. In 
the exporting industries the higher wages will be the result 
of higher prices; but in other industries higher prices will 
be as much a result as a cause of higher wages. The process 
of adjustment and enhancement will probably be slow and 
uneven, and will take time. In an immobile country, where 
custom and tradition have a strong hold on prices and wages, 
it may take a generation. Even in a mobile modern country, 
it will take years. But domestic prices will be higher in the 
end than they would otherwise have been. This, no doubt, is 
the sense which the older economists really had in mind when 
they set forth that a country having favorable terms of inter- 
national trade would possess high prices. But their mode 
of stating the case might be easily understood to mean that 
domestic prices in such a country were higher than prices of 
the same things in other countries, which is a different propo- 
sition, and, as we have seen, a doubtful one. 

Further, it is not certain that under the conditions thus 
assumed domestic prices will rise at all. Pari passu with 
the rise of money wages due to the country's better position 
in international trade, there may be improvements in the 
arts or the opening of new resources, which will reduce 
domestic prices or prevent them from rising. Given this 
force in operation on domestic prices at the same time with 
a turn in international trade causing money incomes to rise, 
and the parallel movement of wages and prices will be broken. 
Such was the general trend — rising wages and falling prices 
— through the last thirty years of the nineteenth century; 
it may prove to be again the trend before the close of the 
present century. 

The experience of 'the United States during the last quar- 
ter of the nineteenth century serves to illustrate the principles 
just stated, precisely as the general range of our domestic 
prices has served to illustrate the relation between interna- 
tional trade and domestic prices. A striking phenomenon in 



Wages and Prices 87 

the international trade of the United States during this period 
was the insistent demand of foreign countries for our exports ; 
and at no time was this more striking than during the closing 
years of the century. The main items in our exports are 
still the great agricultural staples: cotton, wheat and flour, 
other grains, meat and meat products. These are necessaries, 
or articles of enjoyment so habitually in use that they are 
very reluctantly dispensed with. The increase of population 
and the slow steady rise in the standard of comfort the world 
over, and particularly in European countries, caused an un- 
relaxing growth in the demand for them — a demand check- 
ered indeed by the accidents of seasons and crops, and by the 
oscillations of industrial activity, but on the whole advancing 
without relaxation. So far as our imports are concerned, 
some are in similar strong demand on our part : coffee, sugar, 
tea, are insistently called for. But the imports of manufac- 
tures are mainly in a different case. They are articles easily 
dispensed with, more quickly dropped when their prices are 
high or times are hard, less easily stimulated to further use 
when their prices are lowered. All this brings it about that 
our exports are more easily and certainly disposed of abroad 
than imports are disposed of here. Hence specie tends, on 
the whole, to flow to this country (or, what comes to the same 
thing, the domestic output of specie is retained within our 
borders), and money wages and domestic prices tend to be 
high. That is, money wages tend to be high as compared 
with foreign countries, and domestic prices tend to be high 
as compared with what they otherwise would have been in 
our own country. 

The forces which have brought about these consequences 
have not acted with uniform pressure. There has been a 
succession of pushes. Recurrently, periods have come when 
large crops of cereals in the United States have coincided 
with short crops in Europe or when the American cotton crop 
has declined or failed to grow. Then the insistent European 



88 Free Trade, the Tariff and Reciprocity 

demand has made itself felt with sudden effect. Exports 
have swollen and have exceeded the imports ; specie has flowed 
in ; a period of excitement, rising prices and speculation, has 
begun. Such was the nature of the upward movement of ; 
1897-1903. The revival of activity after the depression of 
1893-97 was due to the slowly gathering demand for the 
staple exports ; and the maintenance of activity was due fun- 
damentally to the same increasing demand. 4 Hence imports 
of specie, retention of the domestic specie product, rising 
wages, rising prices. The rise in money incomes was well- 
nigh universal. The rise in domestic prices was less so, be- 
cause offset here and there by improvements in the arts. All 
the demands of trade unions and all the scales of higher 
wages were immensely promoted by these conditions, if, in- 
deed, they were not mainly caused by them. Labor unions, 
strikes, trade agreements, were the mechanism by which the 
fundamental cause has worked out its effect. That mechan- 
ism, no doubt, has important independent effects of its own ; 
but it is not to be supposed the sole force or the strongest 
force in operation. 

The favorable position which the United States thus has in 
international trade reacts on the effects of the protective sys- 
tem. That system has checked the demand for imports, and 
made it more difficult for foreign countries to provide the 
wherewithal for discharging their obligations on account of 
the exports which they want so insistently. The result has 
been that money incomes in the United States, which would 
be high in any case, have been pushed even higher ; and thus 
domestic prices also have been held higher. On the other 
hand, the prices of imported goods have been depressed • — 
either actually lowered or kept lower than they would have 
been — and the people of the United States have gained as 

* See the excellent analysis of the economic history of the United 
States during this period by A. D. Noyes, in the Quarterly Journal of 
Economics, vol. xix., February, 11)05. Compare also the article by 
A. P. Andrew in the same journal, May, 1906. 



Wages and Prices 89 

consumers of imported goods. So far as they have been sue 
cessful in stimulating the domestic production of goods that 
would otherwise have been imported — that is, so far as the 
protective system has achieved its avowed effect — this gain 
has been simply thrown away, and a loss has been substituted 
for it. But so far as importation has continued, the gain 
has been really secured. Many imports come in over the 
tariff barrier. These of course are raised in price over the 
foreign price by the extent of the duties; but the treasury 
then gains what the consumers pay, and other taxes are pre- 
sumably dispensed with; and the foreign price itself is 
lower than it would otherwise have been. As to duty-free 
imports, there is obviously a clear gain. They are lower in 
price, and the money incomes for buying them are higher. 
Whether the loss in buying the home-made protected com- 
modities outweighs the gain in buying the commodities that 
continue to be imported is quite impossible of calculation. 
The ardent protectionist might find in this sort of reasoning 
a tenable ground for supporting his policy in a country 
situated as the United States has been; but few protection- 
ists follow the strict logic of economics far enough to per- 
ceive the advantage which they might thus vaunt. 

A last word may be said as to the relation of all this rea- 
soning to the modern development of the theory of value, and 
more especially to the question how far value depends at 
bottom on utility, how far on sacrifice. The Eicardian as- 
sumption — tacitly followed in the preceding pages — was 
that in domestic exchanges values and prices depended oil 
sacrifice, on labor. Those commodities, it was supposed, 
whose labor cost was low would be low in price, and so would 
tend to be exported. But do value and price depend on labor 
cost ? Are there not, to use Cairnes's convenient phrase, non- 
competing groups ? And is not utility the permanent regu- 
lator of value ? If so, what of the reasoning which assumes 



90 Free Trade, the Tariff and Reciprocity 

that effectiveness and labor cost determine which commodities 
shall be cheap in money, and so shall be exported from a 
country ? 

Some allowance for this turn in the reasoning was made by 
the older economists. Exceptionally low wages in any par- 
ticular industry, it was pointed out, had the same effect in 
international trade as low labor cost. Either served to give a 
comparative advantage, and to cause a commodity to take its 
place in the list of exports. Slave-grown articles were com- 
monly used to illustrate this exception. But an exception it 
was still thought to be. In the main, labor cost determined 
value within a country, and so determined what goods should 
be exported. But, if there be no free movement of labor 
from group to group, and no correlation of capitalists' ex- 
penses to labor cost, will not the whole theory of international 
trade need to be overhauled ? 

The answer to this question is twofold. In the first place, 
there probably is more competition among laborers than the 
bare assumption of non-competing groups admits. Briefly to 
state my own view on this crucial matter, I do not believe 
that competition among workers is so free as to bring about 
an equalization of reward, and to adjust wages to sacrifice. 
There are effective obstacles to free movement. There are, 
in so far, non-competing groups ; and value is proximately 
determined by utility, not sacrifice. But the barriers be- 
tween groups are not impassable. The higher the differ- 
ences in reward, the greater the number who get over the 
barriers and increase the supply in the favorably situated 
groups. Hence labor cost, sacrifice, are always in the back- 
ground, so to speak, and prevent the sway of utility over 
value from being unqualified. The greater the deviation of 
value from equivalence to sacrifice, the less is it likely to 
persist. In the long run, competition between workers ex- 
ercises not a dominating, but a correcting influence. 

However this may be, there is a second reason why the 



Wages and Prices 91 

theory of international trade does not need on this score 
serious modification. Goods are rarely made by workers of 
one grade only. The day laborer does not make one thing, 
the mechanic another, the engineer a third. They join in the 
combined labor applied to all the various commodities. Now, 
if the relations of the different grades to each other are the 
same in different countries, and if the same combinations of 
labor are used for any one article, the conditions of competi- 
tion between the countries are precisely the same as if within 
each country labor cost alone determined value. If the earn- 
ings of engineers are twice as high as those of mechanics in 
all the countries, and the earnings of mechanics twice as high 
as those of day laborers, and if, moreover, the same combina- 
tion of the labor of all three is used throughout in making 
the same commodity, then those things will be cheap which 
are produced in a given country with comparatively little 
labor, and those things will be dear which are produced with 
comparatively much. The former will tend to be exported, 
and the latter will tend to be imported. 

It is not to be supposed that there is, among different coun- 
tries, such absolute identity either in the relations of the 
different grades of labor as has just been assumed or in the 
way in which the grades are combined for the operations of 
production. Though the phenomena of social stratification 
are on the whole similar in the civilized countries, new and 
old, there may be important differences. A particular group 
of workmen may be in higher demand in one country than in 
another. Their wages may be particularly high in the first 
country. If so, though their labor may be efficient, its prod- 
uct will be comparatively dear in price. On the other hand, 
a particular kind of labor may be so abundant as to be cheap 
in one country. Its labor may be paid for on a scale which 
is low as compared with the general scale in that country; 
and then the effect is precisely the same on international 
trade as if such labor were comparatively efficient. 



92 Free Trade, the Tariff and Reciprocity 

Conditions of this kind seem to have developed in the Ger- 
man chemical industry, and to have constituted an important 
factor in its remarkable development during the period pre- 
ceding the war. Chemists were cheap — unusually cheap. 
The industry had at its disposal a highly trained technical 
staff, at wages relatively low. The effect on trade was the 
same as if the staff had been unusually efficient ; the chemi- 
cal products could be put on the market at prices relatively 
low. Probably the staff was in fact not only cheap, but at 
least as good as in other countries. Either advantage, that 
of cheapness or that of efficiency, when particularly marked 
in a given industry, serves to promote the export of that in- 
dustry's products. 

I suspect that a similar situation has appeared in the 
United States in recent times — a situation in which a par- 
ticular kind of labor has been paid, if not at decreasing rates, 
yet at rates that have failed to advance in accord with the 
general rise in money incomes. Broadly speaking, the pay 
of unskilled manual labor did not keep pace with the general 
movement ; relatively, it declined. Most money incomes ad- 
vanced in the United States, and the incomes of skilled me- 
chanics advanced very considerably. But the wages of ordi- 
nary day labor, and of such factory labor as is virtually un- 
skilled, seem to have remained stationary, and sometimes 
seem even to have fallen. The explanation undoubtedly is 
that immigration on a huge scale steadily maintained the 
supply of such labor. The pressure for employment on the 
part of the newly arrived kept down the pay for the simple 
sort of work they could turn to. 

The consequence was that industries making large use of 
such labor were in a better situation than they had been be- 
fore, and held their own against foreign competition more 
easily. The general conditions in the United States tend to 
give a comparative advantage to those industries that employ 
highly skilled labor in larger proportion — those that use 



Wages and Prices 93 

machinery in whose construction and operation such labor 
plays a major part; for it is here that American industry, 
taken as a whole, has proved to have special effectiveness, i. e., 
a comparative advantage. But if unskilled labor is rela- 
tively cheap — at a greater discount, so to speak, than in 
competing foreign countries — the employer may still be able 
to use it with profit in competition with the foreigners. One 
of the striking changes in the economic development of the 
United States during the last generation was the growth of 
manufactures using such labor, the steady decline in the 
prices of their products, and their lessening dependence on 
support from the protective tariff. Such were the manu- 
factures of pottery in its cheaper grades, of silk goods, of 
textiles in general. The cheaping of bituminous coal and 
of coke seems to have been part of the same phenomenon. 
The boasted advance of manufacturing industries was thus 
due in some degree to a change, not entirely welcome, in so- 
cial conditions. No doubt other causes also contributed : the 
discovery and utilization of great natural resources, improve- 
ments in methods and machinery more rapid than the im- 
provements in foreign countries, and protective duties pushed 
up to the highest limit. But it remained true that the com- 
parative degradation of the lowest stratum in the social struc- 
ture was a contributing factor. 

A situation of this sort is not likely to endure indefinitely, 
least of all in a country like ours, where the general condi- 
tions promote mobility of labor. Moreover, legislation for 
checking the continuing inflow of immigrants, such as that 
of the illiteracy test, tends to remove the underlying cause. 
It would be idle to speculate on the movements of population 
that will follow the war in Europe or America, the changes 
in the rates of wages, the coming industrial conditions. The 
case, as it stood for a considerable period, serves to illustrate 
how differences in wages, to the extent that they are more 
marked in one country than in another, influence relative 



94 Free Trade, the Tariff and Reciprocity 

prices and therefore the currents of international trade. 
To sum up the main thesis: so far as there is great ef- 
fectiveness of labor, there will be low prices of those among a 
country's products which come within the sphere of interna- 
tional trade, and such products will be exported. This much 
is familiar doctrine. Domestic commodities, so far as pro- 
duced with the same effectiveness, will also be low in price ; 
if not so produced, will be high in price. This is less famil- 
iar doctrine. And high money wages, in the last analysis, 
are the consequence not of general effectiveness, but of that 
which is found more especially in the production of exported 
goods. 



V 

HOW TO PROMOTE FOREIGN TRADE * 



It is strange that trade between nations should play so 
large a part in fomenting war and warlike spirit. Trade, 
after all, is the peaceful exchange of goods; the more ex- 
tended and far-ramifying it is, the more we should expect a 
trend toward peace and a decline of war. Yet rivalry in 
foreign trade is a powerful adjunct to the forces making for 
war. It leads unceasingly not only to aggression and con- 
test, but to suspicion, irritation, diplomatic intrigues and 
squabbles. Doubtless there is exaggeration in the statement 
that the struggle for trade is the main and sufficient cause of 
all modern wars; other factors are at least equally potent, 
not least among them the inborn fighting instinct. Indeed, 
economic rivalry seems often to be an unconscious manifes- 
tation of the spirit of pugnacious emulation. Each nation 
takes a pride in being the first, the victor, in everything — 
in sport, in art, in letters, in science, in war, and in trade 
also. We have to deal not with a purely mercenary or ma- 
terial state of mind ; it is one of pride and glory, not entirely 
good, but surely not entirely bad. Whether deemed base or 
noble, the commercial phase of international emulation has 
of late contributed less to peace between nations than to war. 

Trade rivalry, however, is fomented and embittered by 
common misconceptions about the relation between foreign 
trade and general prosperity. Many persons, perhaps most 

i An address delivered before the Chamber of Commerce of the United 
States, at Chicago, April 11, 1918. 

95 



96 Free Trade, the Tariff and Reciprocity 

persons, think of foreign trade, and especially of exports, as 
being of cardinal importance to a nation. They speak of 
the export trade as if it were the one fundamental source of 
prosperity, and certainly believe it to be a peculiarly im- 
portant one. It is regarded as the test and measure of na- 
tional gain or profit, the main thing to be striven for. Be- 
fore considering the really important problems that confront 
us, I venture to call your attention to the misconceptions in- 
volved in this opinion and to the way in which they add to 
the difficulty of arriving at a sound national policy. 

We all know that foreign trade, and more particularly ex- 
ports to foreign countries, do not enrich the country by the 
process of bringing in money. We know it, but constantly 
forget it. No educated man would put forth in so many 
words the view that it is the balance of trade, or the differ- 
ence between exports and imports, that signifies for a coun- 
try's prosperity. But many educated men fall into a way 
of talking in which this view is implied. To the man on the 
street it often seems an obvious and undeniable truth. 
Whether put forward indirectly, or directly and unequivo- 
cally, it is persistent and pervasive. 

Now, the one great fact in the normal trade of peaceful 
times is the extraordinarily small flow of money in the set- 
tlement of foreign trade. By " money," of course, in foreign 
transactions, we mean gold. Though every individual trans- 
action is in terms of money — that is, of gold — and though 
the aggregate transactions in terms of money are enormous, 
running into billions and billions, the actual amount of gold 
that changes hands is insignificant. Very small balances only 
are settled in specie. By the mechanism of the foreign ex- 
changes, goods are made to pay for goods, just as they are in 
the mechanism of the domestic exchanges. London used to 
be the clearing house for the complicated offsets and trans- 
fers of international trade, and it was largely through Lon- 
don that the final gold balances were remitted. No doubt we 



How to Promote Foreign Trade 97 

shall see in the future a shift in the center of international 
payments. It would be rash to predict precisely to what 
extent they will cease to be settled through London; but 
there will probably ensue a considerable dispersion of the 
clearing transactions. Some will doubtless be effected 
through London, some through 'New York, some through 
Paris, some through Berlin; and eventually there will not 
fail to be interlocking arrangements between these several 
centers. But in any case, once the world is again settled in 
the ways of peace, the movement of specie will be insignifi- 
cant as compared with the total volume of transactions. All 
this is so familiar that an apology is almost due for restat- 
ing it. 

Needless to say, also, exports pay for the imports. If 
there be a permanent excess of exports from a country — a 
so-called " favorable balance of trade " — it exists simply be- 
cause there are other things to pay for besides the imported 
goods, or (in the converse case) other things for which the 
people of a country have to receive payments than for their 
exported goods. For the forty years preceding the great 
war, we had in this country a great excess of exports, year 
after year ; yet we all know there was a very slight inflow of 
specie. The exports of merchandise were simply the means 
by which we met sundry other obligations, such as interest on 
our debts contracted abroad, tourists' expenditures, remit- 
tances which newly arrived immigrants made to their rela- 
tives in foreign countries, and similar international debit 
items. 

Incidentally, I may remark that one of the things most 
surprising to the economist is the ease and rapidity with 
which this enormous and complicated mechanism functions 
in times of peace. It is remarkable that when a country has 
large obligations of any sort to meet abroad, even though those 
obligations in each individual transaction involve a necessity 
of remitting the equivalent of cash, the movement of actual 



98 Free Trade, the Tariff and Reciprocity 

cash is so small that the other main resource, the movement 
of commodities, seems to take place spontaneously. There 
are some knotty problems as to the precise steps by which 
this apparently spontaneous movement of commodities is 
brought about; but, on the face of the facts, obviously it is 
brought about. Gold moves very little; exports pay for 
imports. 

One of the most persistent forms which the popular mis- 
conception assumes is that of supposing that the balance of 
trade between one country and a single other country is of 
significance. Many think that if we buy more from Cana- 
dians than we sell to them, our trade with that country is a 
losing one. If, on the other hand, we sell more to Canadians 
than we buy from them, they think it is a profitable one. It 
so happens that our trade with Canada has at one time been 
supposed to be in this way disadvantageous, and at another 
time to be advantageous. Half a century ago we bought 
more from Canadians than we sold to them, and were 
thought to be thereby losing money. Of late years we have 
sold to Canadians much more than we have bought of them, 
and have been thought, conversely, to be making money. 
The simple fact, familiar enough to persons conversant with 
international dealings, is that balances of this kind, one way 
or the other, are settled and disposed of by compensating 
dealings with other countries. During the earlier period, 
when we bought more from Canada than we sold, we were 
enabled to effect our payments through exports to England. 
These supplied the basis for sterling exchange and served to 
settle our balances with Canada. In more recent years, pre- 
cisely the converse operation has taken place. We have sold 
more to the Canadians than we have bought from them. But 
the Canadians have sent heavy exports to England, and 
they have also borrowed heavily in England ; and it is their 
credits in England which have enabled them to pay for the 
goods which they have bought of us. From South American 



How to Promote Foreign Trade 99 

countries and from the far east we have bought, year in and 
year out, more than we have sold to them. We have been 
enabled to pay for the commodities thus bought because of 
our heavy exports to other countries, chiefly to Europe. The 
balance of trade between any pair of countries is rarely such 
as to bring about an equalization of their exports and im- 
ports. It is in the grand total of a country's transactions 
that we find the equalization of imports and exports, or rather 
the equalization of all of a country's international debts and 
credits; and it is this broad equalization which serves to 
bring about a settlement without the flow of specie. 

It may be pointed out that the great war, which disrupted 
all international trade and all its mechanism, brought unique 
consequences as regards this particular phase of dealings be- 
tween nations. Although in times of peace the balance of 
trade between one country and any single other country signi- 
fies nothing and does not affect seriously the flow of specie 
between them, the case became different under the conditions 
of the war, and particularly under the conditions which de- 
veloped after our own entry into the war. The balance be- 
tween each pair of countries did come to be of real moment. 
In times of peace the Americans had been able to pay for 
their heavy imports of coffee from Brazil or raw silk from 
Japan through credits based on heavy exports of bread-stuffs 
and cotton and copper to European countries. London was 
the clearing house for these transactions, which were disposed 
of irrespective of the particular relations of the United States 
with Brazil and Japan. But all this mechanism was broken 
up by the war. Our exports were largely on government ac- 
count ; and we got for them not credits in London upon which 
we could draw, but the promises to pay (the bonds) of 
foreign governments, which were tucked away in the United 
States Treasury vaults and for the time being were not avail- 
able for any financial purpose. Accounts in Brazil or Japan 
or Argentina had to be squared in some other way. The ex- 



100 Free Trade, the Tariff and Reciprocity 

ports of specie to thein took place almost solely as a result 
of their special dealings with ourselves. But these were war 
problems, not peace problems ; abnormal and temporary, and 
to be ignored in a consideration of permanent conditions and 
permanent policy. 

The great war brought abnormal conditions in other ways. 
As I have just said, the usual machinery for the equalization 
and settlement of international payments broke down. The 
United States, during the period of our neutrality, did in- 
deed receive great amounts of actual gold, in payment for 
extraordinary exports. After our participation in the war, 
we arranged to end this inflow of gold once for all, and to 
accept from our allies their promises to pay. And yet the 
previous flow of specie, astonishingly great as it was, lasting 
as it did for a period astonishingly long — through the first 
three years of the great war — illustrates the principles with 
which it seems to be in contrast. True, we received unusual 
amounts of specie ; but were we made richer thereby, or more 
prosperous ? The result was higher prices, higher wages, 
higher cost of living, all the phenomena of inflation, all its 
attendants of feverish speculation. We should have been 
better off if we had received not the gold, but the things which 
we ordinarily receive in payment for increased exports, 
namely, a heavier volume of imported commodities. Under 
normal conditions we should have received very little specie, 
but much coffee, sugar, spices, wool, tin, jute, sisal; doubt- 
less also more of finished manufactured goods, such as cot- 
tons, woolens, linens and silks. It is the abundance of these 
commodities which signifies true prosperity. The influx of 
gold resulted simply in the cheapening of gold, that is, in a 
general rise of prices. It supplied the basis for an expan- 
sion of credit which inaugurated the too familiar conditions 
of inflation. These were accentuated after our own partici- 
pation in the war, still stimulated by the great fund of specie 
which had come in before. 



How to Promote Foreign Trade 101 

A further word of introduction and explanation may be 
added on another general aspect of trade between nations. 

The labor and capital which we put into our exported com- 
modities serve to procure for us the imported commodities. 
That labor and that capital may be said with perfect ac- 
curacy to produce the imported commodities. In the same 
way, the labor which the Dakota farmers put into wheat 
growing procures for them, and may be said to produce for 
them, the shoes, iron, and sugar which they buy from New 
England and Pennsylvania and Colorado; and the labor 
which the New England operatives put into manufacturing 
boots and textiles procures for them — may be said to pro- 
duce for them — the wheat and flour which they buy. The 
prosperity of any one geographical group depends both upon 
its turning out a large quantity of the immediate products of 
its own labor and upon exchanging those products for other 
products. Our foreign trade, our combined imports and ex- 
ports, promote our prosperity as a people if we produce ef- 
fectively and cheaply commodities which we export, and if 
we also exchange those exported commodities on advantageous 
terms for the imports. It is the first-named factor which is 
the more important: the gain which we secure from our 
foreign trade depends chiefly on the effectiveness with which 
we apply our labor to produce exports. 

Now to this proposition I invite attention somewhat more 
carefully because on it hinges what I shall say presently con- 
cerning the way in which we should shape our commercial 
policy. Our foreign trade promotes our prosperity if we 
make our exported goods effectively and cheaply. The fun- 
damental factor is the effectiveness of our labor and capital, 
and the cheapness with which we can consequently put our 
commodities at the disposal of foreign purchasers. By cheap- 
ness is meant, cheapness all things considered; quality as 
well as quantity, good quality as well as moderate price ; or, 
if the price seem high, quality so good as to make the high 



102 Free Trade, the Tariff and Reciprocity 

price worth while. Sometimes the needs of other people are 
satisfied by giving them large quantities of goods of poor 
quality at a low price; and a considerable part of the ex- 
port trade of England and Germany is secured in this way. 
The exports from the United States have usually been good 
rather than cheap — not so much low in price, as good in 
quality and moderate in price. But in any case it is the 
effectiveness of our industrial powers in producing a thing 
which is cheap in comparison with its quality that under- 
lies all prosperous foreign trade. The very existence and 
maintenance of exports rest on this basis. All trade promo- 
tion, all banking and transportation facilities, all trade 
agents and embassies, all agitation, all patriotic devotion, 
avail nothing if this fundamental factor be lacking. 

The effectiveness of labor and capital means something dif- 
ferent from that which is usually implied by " efficiency." 
" Efficiency," as that word is often used, refers to special 
and individual skill, intelligence, and activity on the part 
of the individual workman; to his mental endowment or 
personal aptitudes or muscular strength. Now it is true 
that the high standard of living and the greater spirit of 
activity in this country do bring it about that our workmen 
are, man for man, more efficient than those of foreign coun- 
tries. But it is not solely or even primarily efficiency in this 
sense that is had in mind when speaking of the effectiveness 
of our labor and capital. The terms refer to the cumulative 
influence of all the factors which combine to bring about 
the final production and final putting on the market of the 
exported commodities. The factors are many and diverse: 
not only the efficiency of the individual men, but ingenuity 
on the part of inventors and engineers in perfecting ma- 
chinery, skill in the designing and organization of plants, 
brains and enterprise in management, intelligence in the dis- 
tribution and sale of the goods. No small part is played by 
transportation and especially by inland transportation. 



How to Promote Foreign Trade 103 

Whatever may be charged against our railways, they have 
succeeded in cheapening transportation immensely, especially 
in long-distance hauls, and they have been a powerful factor 
in increasing the effectiveness of the total labor of the in- 
dustrial processes. And, throughout, the thing which prob- 
ably tells most of all in assuring a combined effectiveness of 
our labor and capital is industrial leadership. It is this 
which has made the modern economic world ; it is this which 
justifies business and the profits of business. I need not 
say that this means also leadership in service. Successful 
leadership implies as its end and purpose, not money making, 
but service in promoting the effectiveness of industry. That 
the spirit of successful leadership is the spirit of service has 
never been more fully demonstrated than during this, the 
first year of our participation in the war. The business lead- 
ers have recognized their responsibilities and taken advantage 
of their opportunities. They have put themselves at the 
service of the government and have served without stint in 
the conduct of its affairs. Money making is evidence of ca- 
pacity to do service ; true success, whether in war or peace, 
is the rendering of the service. 



ii 

We shall come nearer to the heart of the matter, when 
we pass from these generalities to some things more con- 
crete and, more particularly, to some conclusions which fol- 
low from these simple and incontestable general principles. 
Let us consider some devices for promoting foreign trade 
which in the light of these principles appear dubious. They 
appear dubious because not consistent with the fundamental 
principle of effectiveness. They are not indeed to be con- 
demned offhand; but they call for critical examination, for 
careful discrimination, perhaps for rejection. 

First of all, and most dubious of all, are export boun- 



104 Free Trade, the Tariff and Reciprocity 

ties — bounties paid directly by governments upon the ex- 
port of commodities. These are, on their face, a confession 
of lack of effectiveness. They mean that the commodities 
cannot be exported upon their merits. True, they may mean 
low price in the sale of the commodities, since the exporter 
makes up for a price in itself unprofitable through the bounty 
paid him. But that very circumstance indicates that the 
sales do not mean low cost or, what amounts to the same 
thing, do not mean high effectiveness. The bounties do not 
really cheapen your goods in the important sense of cheap- 
ness ; they mean that a payment from the public purse makes 
up for a lack of effectiveness. Remember that, in the last 
analysis, the labor which procures imports is the labor which 
serves to produce your exports. If an export bounty is paid, 
you must reckon as part of the total cost of the exports not 
merely the labor directly applied to them, but also that which 
is involved in the export bounty. The money for the export 
bounty comes out of taxes ; and taxes mean that a part of the 
community's labor is turned by the government into the chan- 
nels for which its payments are made. In addition to the 
labor needed for producing the exports, we must reckon the 
labor involved in paying the bounty. A country simply de- 
ceives itself when thinking that it gains by this process. 

Only if we accept the old and long discarded notion that 
any foreign sale whatever is profitable, can we conceive of 
export bounties as being advantageous to a nation. If in- 
deed we take the view that an export sale in itself necessarily 
constitutes a profit ; if we are so ill-informed as to think that 
the gold actually flows in for every item of exported goods, 
and so ill-advised as to believe that an unending inflow of 
gold makes a country unendingly prosperous, then indeed 
we may think that export bounties promote fundamental pros- 
perity. But the fallaciousness of this way of looking at the 
matter does not need to be dwelt upon. The exports signify 
not gold or riches, but imported goods got in exchange; and 



< 



How to Promote Foreign Trade 105 

if in the payment for those imported goods we also tax our- 
selves in order to pay a bounty, we lose so much of the re*l 
gain from foreign trade. ^ 

It is fair to say that direct public bounties upon exports 
have virtually ceased. The most striking instance of their 
payment upon a large scale was in the bounties upon the ex- 
port of beet sugar which were paid for some twenty years 
preceding 1903 by various continental countries. All these 
countries sinned, and all of them became in due time thor- 
oughly repentant. The senseless rivalry in bounty paying, 
upon exportation of beet sugar went so far as to make serious 
inroads upon the public exchequers of several countries, and 
it was a real relief to all hands when Great Britain in 1903, 
by refusing to remain longer the one country into which 
bounty-fed sugar could be dumped upon a considerable scale, 
put an end to the whole business. 

The second dubious device, and one in which the prob- 
lems are more difficult and complicated, is that of special" 
transportation rates for export business. To simplify the 
question of principle here involved, and strip it of the polit- 
ical and naval problems that are connected with ocean trans- 
portation and the merchant marine, let us confine the dis- 
cussion to rates for inland transportation. Railroad rates 
constitute the most conspicuous and the most debatable prob- 
lem. It must be admitted that most governments do in fact 
follow the practice of allowing special railroad rates for ex- 
port business ; not only Germany and France and the coun- 
tries of the Continent generally, but the United States also. 
Our inland rates to the seaboard on various commodities are 
lower for export business than for purely domestic business. 
The Germans are often roundly accused of making repre- 
hensible use of this device. It must not be forgotten that we 
have done the same under private management of railways, 
and that our governing authority, the Interstate Commerce 
Commission, has repeatedly sanctioned the practice. 



106 Free Trade, the Tariff and Reciprocity 

It is obvious that if a railroad were to transport for noth- 
ing — if it were to give away the transportation once for all 
#-the case would be the same as that of an export bounty. 
The article so transported could indeed be sold abroad at a 
comparatively low price. But that low price would not be a 
sign or a consequence of effectiveness in production ; for there 
would not be included in the price a real and important 
element of actual cost, namely, the transportation expense. 
In such a case we should not be exporting at really low cost ; 
we should be concealing a substantially higher cost. The 
item of railroad transportation would not be obliterated or 
saved, but would be simply paid for in some other way. It 
would be made up either by the railroads themselves out of 
their general profits, or by the domestic shippers and con- 
sumers through higher rates upon domestic business, or by a 
combination of these processes. 

If transportation is not given away outright, but is offered 
at reduced rates on export business, the case seems to be in 
essence the same, only not to proceed quite so far. To the 
extent to which the process of reduction or favoritism is car- 
ried, there is a concealment of real cost. Consider the sev- 
eral elements of the situation. The export rate is lower than 
the domestic rate. But that domestic rate itself may be pre- 
sumed to be reasonable, that is, reasonable in view of cost of 
carriage, and based principally on cost of carriage. All our 
regulatory legislation, our Interstate Commerce Commission, 
all our state commissions, are established to insure the car- 
riage of traffic at reasonable and proper rates ; and reasonable 
and proper rates are such as conform upon the whole to cost 
of carriage. If, now, the domestic rate is reasonable, and the 
export rate is lower than the domestic rate, the export rate 
will seem necessarily to be less than cost of carriage. Such a 
special export becomes a device for artificially forcing the 
exports, and is essentially like a bounty; it means sham ef- 
fectiveness, not real effectiveness. 



\ 



• 



How to Promote Foreign Trade 107 

It must be admitted at once that this is by no means every- 
thing that can be said on the problem of railway rates on 
export business. The railway rate problem is high-v com- 
plicated. Every student of the relation of rates toljfost of 
carriage knows that cost is almost impossible to allocate with 
exactness. " Seasonable rates " are extremely difficult to fix 
with precision. Even though a general average be arrived 
at which is in right relation to cost of carriage, the determina- 
tion of such an average does not necessarily lead to the corol- 
lary that each individual rate can or should be similarly 
fixed in direct relation to cost of carriage for the individual 
item of traffic. Special rates are often justified by special 
traffic conditions. Special rates upon export traffic may also 
be justified in view of special conditions. But it would seem 
that they should be granted only in the same way and on the 
same principles as any other special rates — perhaps in view 
of unusual competition by alternative routes, perhaps in 
view of the utilization of equipment otherwise idle. They 
should not be granted simply and solely on the gr und of 
export destination. Here, too, we must not delude ourselves 
with the belief that the mere fact of export, not based upon 
a real effectiveness in producing and transporting and mar- 
keting the exported commodities, brings a special gain to 
the country. If indeed we believe that any and every kind 
of export is in itself desirable, that it necessarily brings 
of itself a net gain to the country, then and then only we 
shall be prepared to admit, as in the case of direct bounties, 
that special transportation rates for export are in themselves 
desirable. Special export rates are open to suspicion on the 
same ground that export bounties are to be rejected. The 
case for them must be affirmatively established, like that for 
every special rate in every branch of railway transportation. 
Turn now to a third device, also questionable. What is to 
be said of special prices made by the producers for export 
business — lower prices than are asked and expected on 



108 Free Trade, the Tariff and Reciprocity 

strictly domestic sales? Are they good, and are they to 
be encouraged? 

On the face of it, lower prices for exported goods than 
for the | identical goods sold in the domestic market seem 
open to the same objections as transportation favors, and 
seem equally dubious. Here, in the case of railway rates, 
let us fasten attention to special arrangements resting solely 
upon the fact of export destination. We seem to be con- 
fronted by a similar dilemma. If the export price is spe- 
cially low, the domestic price must be made specially high, 
and (£t would seem) must be unreasonably high. If the 
export price is lower than would be warranted by real ef- 
fectiveness, the domestic price must be higher than is war- 
ranted by real effectiveness. If the export sales are at less 
than cost, domestic sales must be made at more than cost. 

This dilemma is most often stated, and most effectively 
stated, in cases where there is monopoly or something close 
to monopoly. Suppose that a single concern has control of 
a given product or set of products; it will often sell in one 
market at a cheaper rate than in another market. A glaring 
instance, laid bare by repeated public investigations, was 
that of the policy which the Standard Oil combination fol- 
lowed in its domestic transactions; it sold in some domestic 
markets at lower prices than in other domestic markets. 
Now, if the price in the favored market was sufficient and 
reasonable, ipso facto the price in the non-favored market 
was more than reasonable. Similarly, if an export price is 
in itself sufficient and reasonable and in right accord with 
cost, then the domestic price, if greater, must necessarily be 
unreasonably high and in excess of cost. If, on the other 
hand, the lower price to foreigners is in itself not enough 
to cover costs, then the domestic price must in the long run 
cover the difference; the domestic price must be too high. 
And in this latter case the exports, if made at prices which 
do not in the long run really cover costs, are based not upon 



How to Promote Foreign Trade 109 

real effectiveness of industry, but upon concealment of real 
cost, precisely as in the case of export bounties. The prac- 
tice seems to involve either undue prices to the domestic 
consumer, or else a sham effectiveness in producing the ex- 
ported article, not real effectiveness. 

Here again, as in the case of railway rates, this mode 
of dealing with the problem may not probe it to the bottom. 
If railway rates are highly complicated, some problems of 
price and of cost in relation to price are almost equally com- 
plicated in any large-scale industry. The situation is far 
from simple ; it raises all the questions of fixed charges, of 
overhead expenses, of cost accounting and the allocation of 
costs, of business policies in the face of fluctuating demand, 
of the ways of meeting alternate cycles of activity and de- 
pression, of security and continuity in industrial operations. 
It raises, too, the question of the difference between a sporadic 
and a systematic application of special export prices. In the 
early stage of export trade, special allowances on exports 
may be part of an effective policy of merchandising. Prac- 
tices of this kind tend to become less widely applied in the 
later stage of fully developed and continuous export business. 
There are here unsettled questions not only of economic an- 
alysis, but also of sound business policy and of effective in- 
dustrial leadership. 

But when all is said, it would still seem that practices of 
this sort, namely, special rates upon export trade, must be on 
the defensive. It needs to be proved that they are really ad- 
vantageous to the community. At first sight they appear to 
be disadvantageous — to mean not real effectiveness of in- 
dustry, but concealment of a cost or burden actually incurred 
in the export part of a business, yet borne not by that part but 
by the rest of the business or by the community at large. 
And here once more let us not fall, as involuntarily we do, 
into the deceitful belief, or perhaps the flattering unction, that 
the sending of goods abroad is in itself a thing whic^i brings 



110 Free Trade, the Tariff and Reciprocity 

money into the country and thereby makes us all more pros- 
perous. Let us hold fast to the fundamental principle that 
the exports are the means of producing the imports, and that 
only if there be real effectiveness, real success in the appli- 
cation of our labor and capital, does the country gain. 

In all discussions of special export prices and of dump- 
ing, a distinction must be borne in mind between sporadic and 
permanent transactions — between occasional sales at special 
prices and a permanent policy of lowered prices for export. 
~No one questions that conditions may arise at times in any 
business venture which will compel the disposal of a block of 
commodities at any price they will fetch when thrown upon 
the market. These are not pleasant or welcome conditions, 
but they must be faced as sometimes inevitable. It is quite 
a different matter, however, to sell permanently and syste- 
matically one part of your output at a different price from 
the rest of your output. To put it another way, it is more 
than questionable whether overhead or general expenses 
should be permanently distributed in such a way that any 
part of the sales will be made without consideration of this 
burden, or without due consideration of it. In the long run, 
and as a matter of permanent policy, every part and parcel of 
the output should bear its due share of the total cost of bring- 
ing it to market. If in the long run it does not so bear its 
due share — if it is sold in such a way that the overhead or 
general expense is not properly debited against it — then 
sooner or later the rest of the output must bear more than its 
due share of the general expense. The overhead must be 
paid for somehow. No part of a business really pays which 
fails to pay its proportionate share of the expenses of con- 
ducting it. This is no less true of foreign trade than of do- 
mestic trade; no less true for the country at large than for 
a separate business. Sales may be made occasionally with- 
out regard to general cost, and even with little regard to the 
direct c * specific expenses entailed for the particular items. 



How to Promote Foreign Trade 111 

But in the long run, and as a permanent policy, sacrifice sales 
and special price sales are not profitable to the individual 
business, and are not profitable to the nation. In our dis- 
cussions of foreign trade and of foreign trade policy it is the 
permanent conditions and the long run results which we must 
primarily bear in mind. The continuous and successful ex- 
pansion of foreign trade must rest not upon sporadic or occa- 
sional transactions, but upon those which can be continued 
with advantage year after year, and on essentially the same 
basis year after year. 

Fourth and last, is a dubious device of a different sort: 
special concessions in foreign countries, in the form of lower 
rates of duty on our goods when exported to those countries. 
Shall we try to arrange commercial treaties or reciprocity 
agreements on the basis of assuring to American commodities, 
when they reach the foreign custom house, lower rates of duty 
than are exacted on the same commodities when imported 
from third countries ? To simplify this case also, let us set 
aside any arrangements which are based on particularly close 
political ties or on geographical contiguity. We have at pres- 
ent, for example, arrangements with Cuba by which Amer- 
ican commodities are admitted into Cuba at lower rates of 
duty than commodities from other countries. These arrange- 
ments have a political as well as an economic aspect. They 
were introduced and justified largely upon political grounds, 
indeed quasi-sentimental grounds, namely, the close affiliation 
between this country and Cuba which was the result of our 
intervention in freeing Cuba from Spain. Let us set aside, 
also, cases in which there is an extended common frontier. 
Such a frontier exists between Portugal and Spain, or, to 
come nearer home, between the United States and Canada. 
Our border is contiguous to that of Canada over many thou- 
sands of miles and the facilities for convenient border trade 
at many points would readily justify our entering into spe- 
cial commercial relations with Canada. We had SAch rela- 



112 Free Trade, the Tariff and Reciprocity 

tions in the past, under the reciprocity treaty of 1854, and 
on our statute books we still have the reciprocity act passed 
in 1911 ? offering freedom from duty for a considerable list 
of articles on condition that Canada grant to our commodi- 
ties a like freedom. That offer we still hold open. Cases 
of this kind — our relations with Cuba and Canada — 
present some problems of their own, to be dealt with on 
grounds of their own. The question of principle may be 
weighed quite on its economic merits, by examining a spe- 
cial arrangement where there are no such special circum- 
stances. Consider, for instance, the arrangement which we 
now have with Brazil whereby certain American commodi- 
ties are admitted into that country at lower rates than are 
imposed upon the same commodities when they reach. Brazil 
from other countries. 

Here again the test of real effectiveness may be applied. 
Special favors in Brazil may enable us to sell our exports 
to Brazil; but they do not cause us to be really effective in 
serving either the Brazilians or ourselves. If our exporters 
cannot do the business without the discriminating rates — if 
they cannot sell in Brazil without such aid — then the ex- 
porters of other countries are obviously more effective in serv- 
ing them. Our exporters then are bolstered up, not indeed 
at the expense of our own treasury or of our domestic cus- 
tomers, as in the case of export bounties or of special trans- 
portation rates, but at the expense of the Brazilian consumers. 
Their lack of real effectiveness is made up by the exclusion 
of the more effective competitors. It is once more a case 
not of real effectiveness but of sham effectiveness. 

Once more, let me not be misunderstood. Ties of friend- 
ship and of friendly political affiliation may lead to special 
reciprocity rates or to special trade agreements, regardless 
of direct material benefit to one party or the other. Of this 
our relations with Cuba give a striking example. But the 
governing conditions of trade in the world at large are not of 



How to Promote Foreign Trade 113 

this sort. Trade in the main has been and will be a matter 
of material advantage. In the main we must export on the 
same terms and on the same conditions as our rivals. If we 
secure special favors, we can justify them only on the ground 
that the countries which grant them are willing to make a 
sacrifice for the sake of carrying on a trade which is not in 
itself the most advantageous for them. In the long run, how- 
ever, we cannot expect thean to do other than to maintain the 
most advantageous trade. In other words, in the long run we 
must rely upon real effectiveness and upon real service, not 
upon special favors or discriminating rates of duty. That 
which is advantageous in our own domestic transactions, 
namely, the maximum effectiveness of labor and capital in 
production, is also advantageous in our foreign trade, both to 
ourselves and to countries with whom we trade. All favors, 
all discriminations, all special rights, all promotion and ad- 
vertising, sink into insignificance as compared with this fun- 
damental factor. To make our export trade enriching and of 
real national profit, we must so organize and conduct our in- 
dustries that we shall make goods plentifully and cheaply, 
and we must sell our goods on their merits and on tempting 
terms, to every customer at the same price. 

To take this position is by no means the same thing as to 
adopt a policy of laissez faire in foreign trade ; neither does 
it imply any commitment one way or the other on the question 
of protection and free trade. It does imply. a policy of non- 
discrimination, or at least one of resolvedness neither to dis- 
criminate nor to be discriminated against. The United 
States must hold itself free to adopt such tariff policy as 
seems suited to its own interests. It must leave to other 
countries the same freedom. But whatever tariff system we 
adopt, we should aim to apply it without discrimination to all 
comers; and whatever system another country adopts we 
should wish that country to apply to ourselves on the same 
terms and in the same way as to others. The essential prin- 



114 Free Trade, the Tariff and Reciprocity 

ciple in the general attitude which I here suggest is that of 
non-discrimination. 

It is conceivable that a policy of this sort cannot be car- 
ried out to the full. Indeed, it is certain that it cannot be 
successfully carried out by merely proclaiming it, or by 
merely expressing our wish to abide by it. Other countries 
may adopt tariff legislation which discriminates against the 
United States. Should they do so, we must be prepared to 
apply pressure to them, and in case of need to discriminate 
against them. We now (1918) possess virtually nothing in 
the nature of a bargaining weapon. Something of the sort is 
indispensable. We should have provisions on the statute 
books enabling the administration to meet discrimination 
by discrimination, force by force. We should be able to say 
to other countries which refuse to grant us terms as favor- 
able as their terms to third nations, that we shall in turn sub- 
ject them to unfavorable or discriminating rates. But our 
purpose in securing and exercising this should be not that of 
putting discriminations into effect, but that of removing 
them. The goal, to repeat, should be the open door, the 
same treatment for all. 

To sum up: the four devices for promoting export trade 
considered in the preceding discussion are first, export 
bounties ; second, special transportation rates on export traffic ; 
third, special reduced prices on commodities sold for export ; 
and finally, lower duties on American goods in foreign coun- 
tries, secured by negotiation or treaty. Among these the 
first and the fourth — export bounties and duties discrim- 
inating in our favor — are the most dubious of all. The sec- 
ond and third — special transportation rates and special ex- 
port prices — though they raise intricate questions and are 
not so clearly out of accord with sound policy, nevertheless 
have a presumption against them. In all four cases we 
should at the least pause, and inquire with a fair and open 
mind whether these several methods of action really conduce 



; 



Sow to Promote Foreign Trade 115 

to the prosperity of the United States or the prosperity of 
nations. 

Not only, however, are such devices dubious, sometimes 
even clearly bad ; but they are constant causes of misunder- 
standing, suspicion, recrimination, international friction. 
They arouse irritation most of all when they are concealed, 
or supposed to be concealed. Like many another aggressive 
act, they stir resentment most sharply when they are furtive. 

It is not difficult to adduce cases where there has been 
concealed or furtive resort to one or another of these devices. 
One instance of the kind has already been referred to, namely, 
the much-discussed export bounties on beet sugar from the 
continent of Europe. They had their origin in a drawback 
payment which was supposed to be merely the equivalent of 
an internal or excise tax, but which in fact developed into a 
bounty because in excess of the excise actually collected. A 
similar case has more recently been the occasion of a ruling 
by our own Treasury Department. Certain drawback pay- 
ments were made by Germany on the export of grain and 
flour, based not upon the exportation of the identical ma- 
terials on which the taxes had been paid (in this case import 
duties) but upon the exportation of equivalent amounts irre- 
spective of identity. Our Treasury Department felt com- 
pelled to rule that a virtual bounty upon export had been 
paid — not necessarily with deliberate intention, but with 
substantially the outcome of a bounty payment. Cases of 
this kind are precisely of the sort to arouse suspicion of an 
intent to circumvent a competitor which does not appear 
upon the face of the proceeding. The same is true of the 
preferential transportation rates. True, they may rest on a 
really sound railway policy ; they may be occasioned, for ex- 
ample, by competitive route conditions such as are universally 
recognized, both in the policies of privately owned and of pub- 
licly owned railways, as justifying special rates. Neverthe- 
less, when granted to export traffic, the suspicion always arises 



116 Free Trade, the Tariff and Reciprocity 

that they rest not honestly upon a sound basis of this sort, 
but upon something different and dubious. They are be- 
lieved to evince an endeavor to outwit and circumvent, by 
hook or by crook, the foreign competitor. 

One further case in which misunderstanding and sus- 
picion arise deserves to be noted. The mode in which inter- 
national arrangements for favors in the way of import duties 
are brought about may be the cause of irritation on the part 
of rival countries. The arrangement now in force between 
the United States and Brazil, admits some American com- 
modities into Brazil on the payment of duties lower than 
those applicable to commodities from other countries. We 
thus possess in Brazil the dubious advantage of duties dis- 
criminating in our favor. It rests, however, upon no treaty 
or commercial agreement, but on the voluntary act of Brazil. 
So far as appears upon the official record, that country, out 
of spontaneous friendliness for the United States, voluntarily 
grants us the discriminating duties. Yet any one conversant 
with the history of our dealings with Brazil knows that the 
arrangement goes back to a preceding period of negotiations 
and treaties in which we asked urgently for favors of the 
same sort. Whatever the formal record, it is not supposed 
by any open-minded and well-informed person that the favors 
were granted without persuasion by our diplomatic repre- 
sentatives. Certain it is that they are supposed by other 
countries to have had such a basis and such an origin. We 
possess advantages, but do not come into the open and let it 
be knowii in what manner or by what sort of persuasion we 
have succeeded in securing them. Our position, at best not 
easily defended, is the more open to attack because believed 
to be not entirely straightforward. 



How to Promote Foreign Trod* 117 



in 



I pass now to some considerations of a more general sort. 
What is our present attitude in the international sphere? 
All relations between nations are in the melting pot. The 
great war has opened a new era. We cannot separate our 
industrial and trade policy from our political and military 
policy. Whatever attitude we take toward the world in the 
larger phases of international politics must he reflected in our 
policy with regard to foreign trade. 

One common attitude should lead us to pause and reflect. 
We are often told of America's opportunity, of the opening 
made for American trade and American exports by the oust- 
ing of the Germans and the crippling of the European coun- 
tries which are our allies. We have a chance to establish 
ourselves, it is said. Let us oust our rivals, push our trade, 
get a firm footing, hold our gains after the war. 

Much of the language used in this connection has not a 
pleasant or a generous sound. It suggests a spirit of re- 
joicing at a chance to hit one's rival when he is down. We 
are urged to take advantage of the misfortune and weakness 
of others, and to establish ourselves in their places in such 
a way as to prevent them from having any opportunity there- 
after. We much resent such an attitude when we suspect 
it in the case of another country. Should we not sedulously 
refrain from manifesting an ungenerous attitude ourselves ? 

The war beyond doubt will alter seriously the old currents 
of trade. The force of habit is strong in commerce between 
nations as it is in commerce within a country. Many trade 
relations of the past have maintained themselves largely by 
inertia. The war necessarily brings a shock, and makes pos- 
sible new combinations. The situation is not dissimilar in 
our import trade. There too the war has precipitated a 
change. Some commodities formerly imported into the 
United States may never be imported again. Inconsequence 



118 Free Trade, the Tariff and Reciprocity 

of the cessation of imports, goods formerly imported have 
been made by domestic producers who may hold their own, 
even without any changes in our import duties, when peace 
has once been restored. As regards exports also, it will 
probably turn out that some commodities of which the foreign 
sale has been suddenly and even dramatically stimulated by 
war conditions, will continue to be exported after the restora- 
tion of peace. All the ties and traditions of former times 
have been broken. The opportunity is open to all ; the field 
is free. But let us enter it as a free and open field, and not 
endeavor to make it a closed field of our own. Let us rest 
our forward endeavors not upon the misfortunes or weak- 
nesses of others, but on our own inherent strength. Let us 
ask no favors, let us use no unfair or deceptive devices. Let 
our true strength be revealed, not our weaknesses concealed 
and overcome by artifice. 

These reflections, combined with a rational conception of 
the significance of foreign trade and of the best ways of pro- 
moting it, lead finally to two fundamental conclusions. 
First, the extension of our export trade should be based upon 
effectiveness in service — on well-paid labor well applied, 
and on serviceable goods produced cheaply and offered to all 
comers on the same terms. Our international trade, like our 
international polity, rests on a sound basis only if it conduces 
to the advantage of others as well as to ourselves. We shall 
exchange goods profitably with other countries if the profit 
and the benefit of others are no less than our own. And this 
result is achieved, to repeat once more, not by bounties, not 
by special prices, not by overt or furtive discriminations in 
our favor, but by the plain and fundamental fact of doing our 
work well and doing a service to others. The keynote of 
our foreign trade policy should be effectiveness in industry, 
service to all. 

Second, our international policy should be frank and open, 
and in commercial matters that of the open door. The open 



How to Promote Foreign Trade 119 

door policy, it need hardly be said, means that we wish no 
special favors for ourselves, and oppose special favors to 
others. We have adopted it and followed it unflaggingly and 
without qualification in the Far East. There we have main- 
tained that the United States and other nations should all 
stand upon the same footing in economic and financial com- 
petition. We believe that all negotiation should be simple 
and straightforward, and that the outcome should be the 
establishment of the same terms for every one. We wish a 
fair field, an honorable rivalry. It is our pride that in the 
Orient we have nothing to conceal, nothing to explain, noth- 
ing to apologize for. Our policy in the Occident should be 
no less the cause for a just pride. We wish for no discrim- 
inations in our own favor, we are opposed to discriminations 
in favor of others. We stand for open dealing, open diplo- 
macy, open commerce. Our democracy is idealistic ; our in- 
ternational aims are idealistic ; our trade policy should no less 
rest upon ideals. 



VI 

RECIPROCITY » 

I do not propose, in the following pages, to consider the 
details of the reciprocity arrangements concluded within 
the last year or two under the provisions of the tariff act of 
1890. My object is chiefly to discuss the mode in which re- 
ciprocity treaties usually operate, to point out the peculi- 
arities of the form of reciprocity which this country is now 
applying, and to say something of the general bearing of 
such arrangements on the problems of international trade. 

The mode of reciprocity provided for in the McKinley 
Tariff Act is unusual. The act gives authority to the Presi- 
dent to reimpose duties on certain articles ordinarily ad- 
mitted free — tea, coffee, molasses, sugar, hides — if he is 
satisfied that other countries, from which these articles are 
sent to the United States, fail to reduce their duties on 
American goods to such an extent as to constitute a reasonable 
equivalent for our remission. 2 In other words, a threat of 

i This paper, published in the Quarterly Journal of Economics for 
October, 1892, is printed here without change. The principles stated 
in it have not been impugned, rather strengthened, by subsequent ex- 
perience. 

2 The often-quoted reciprocity section of the tariff act of 1890 may be 
quoted again : " That, with a view to secure reciprocal trade with coun- 
tries producing the following articles, and for this purpose, on and after 
the first day of January, 1892, whenever and so often as the President 
shall be satisfied that the government of any country producing and 
exporting sugar, molasses, coffee, tea, and hides, raw and uncured, or 
any of such articles, imposes duties or other exactions upon the agri- 
cultural or other products of the United States, which, in view of the 
free introduction of such sugar, molasses, coffee, tea, and hides into the 
United States, he may deem to be reciprocally unequal and unreasonable, 

120 



Reciprocity 121 

imposing duties on their goods constitutes the pressure 
brought to bear on foreign countries. The usual mode of 
reciprocity is different. It does not threaten the imposition 
of new duties, but offers the reduction of existing duties. 
That the United States adopted a form of reciprocity which 
has an aspect perhaps of greater vigor and certainly of less 
courtesy is not the result of any deliberate policy. Like so 
many things in our tariff legislation, it arose without pre- 
meditation. The articles to which the reciprocity provisions 
apply had already been made free of duty on grounds inde- 
pendent of any desire to further foreign commerce. Tea, 
coffee, and hides were freed from duty twenty years ago. 
The abolition of the sugar duty had been settled in the early 
part of the session of 1890, before the reciprocity scheme 
emerged. It was impossible to apply to these articles the 
usual machinery of commercial engagements; and, when a 
policy of reciprocity was suddenly determined on, the only 
way of carrying it out was the peculiar one which was finally 
adopted, as an afterthought, in the tariff act of 1890. 

Before discussing the workings of this unusual form of 
reciprocity, we may consider briefly the effects of the usual 
form — the remission or reduction of duties in return for 

he shall have the power — and it shall be his duty — to suspend, by 
proclamation to that effect, the provisions of this act relating to the 
free introduction of such sugar, molasses, coffee, tea, and hides, the 
production of such country, for such time as he shall deem just, and 
in such case and during such suspension duties shall be levied, collected, 
and paid on sugar, molasses, coffee, tea, and hides, the product of or 
exported from such designated country, as follows " : on sugar, about 
one cent a pound on the ordinary grades ; molasses, four cents a gallon ; 
coffee, three cents a pound; tea, ten cents a pound; hides, one and a 
half cents a pound. 

The negotiations and arrangements which finally resulted under the 
provisions of the act of 1890 are narrated in detail in the Report of the 
United States Tariff Commission on Reciprocity and Commercial Trea- 
ties (1919). The Report covers not only the period of the tariff of 
1890 (pages 145-192), but the entire experience of the United States 
in reciprocity matters. 



122 Free Trade, the Tariff and Reciprocity 






similar favors by foreign countries. Reductions of this sort 
have very different consequences according to the conditions 
under which they are applied. In some cases, they redound 
to the benefit of the foreign producer : in others, they redound 
to the benefit of the domestic consumer. Some consideration 
of these two possible effects will be helpful for the under- 
standing of the general workings of any form of commercial 
engagement. 

Suppose the remission of duty, under the usual form of 
reciprocity, to be applied to one country only. Suppose, for 
example, that we remitted the duty on coffee coming from 
Venezuela, retaining it on coffee coming from other coun- 
tries. The Venezuelan coffee-planters, and not the American 
consumers, would get the benefit of the remission. Vene- 
zuela supplies — or, rather, supplied — only one-tenth of our 
consumption of coffee. The remaining nine-tenths, coming 
from other countries and still paying duty, would be higher 
in price in the United States by the amount of the duty. 
The Venezuelan coffee-planters would not sell their coffee for 
less than other people got: why should they? They would 
simply pocket the amount which otherwise would have been 
paid in duties. In general, it may be laid down that any 
remission of duty which does not apply to the total importa- 
tions, but leaves a considerable amount still coming in under 
the duty, puts so much money into the pockets of the foreign 
producer. 

The United States has had one very striking experience 
of this sort of reciprocity. The treaty made with the Ha- 
waiian Islands in 1876 stipulated for the free admission into 
the United States of certain commodities, among which sugar 
was the most important. In return, we got similar remis- 
sions in the Sandwich Islands. Hawaiian sugar was ad- 
mitted free: other sugar paid duty. The Hawaiian susrar 
formed at the outset only a small fraction of the total supply ; 
and, though it grew very rapidly under the treaty, it never 



Reciprocity 123 

formed more than a tenth of the supply. It was sold, natur- 
ally, at the same price as other sugar paying duty; and the 
American consumer who used it paid a tax in the shape of a 
higher price, exactly as he paid a tax on duty-paying sugar. 
The tax, however, went not into the national treasury, but 
into the profits of the Hawaiian sugar-raisers. Throughout 
the period when Hawaiian sugar was free and other sugar 
paid duty, the price of sugar on the Pacific coast, where the 
Hawaiian sugar was used, was fully as high as it was else- 
where. Whoever got the benefit of the remission of the duty, 
it was not the consumer. In this particular case, it should 
be added, there were some complicating conditions. The cap- 
ital invested in sugar-raising on the Sandwich Islands was 
largely owned by Americans. Consequently, the virtual tax 
still paid by sugar-consumers inured to the benefit of other 
Americans rather than of foreigners. The effect was much 
the same as if the tobacco-growers of the Connecticut Valley 
had been freed from the tobacco tax while other growers 
still had to pay it. Further, the business of refining this 
Hawaiian sugar on the Pacific coast got into the hands of a 
single establishment, the owners of which were largely the 
same persons who had invested capital in sugar-raising in the 
Sandwich Islands. These fortunate individuals consequently 
added the profits of a monopoly of sugar-refining to the profits 
of a tax paid for their benefit by the consumers of sugar. 
The Hawaiian treaty therefore presented peculiarities in 
more respects than one. 3 But we are here concerned chiefly 
with that aspect of it which bears on the subject of the present 
article — the effect on sugar consumers and producers. It 
was clearly the latter who benefited by the arrangement. 
Suppose now a different sort of case — a remission of duty 

3 What is said here refers only to the Hawaiian episode as it had 
developed up to 1892. On its later course see in The Tariff Commis- 
sion Report on Reciprocity, pp. 103-136; and my book on Some Aspects 
of the Tariff Question, pp. 58-69. 



124 Free Trade, the Tariff and Reciprocity 



not to a single country, but to a number of countries, so con- 
siderable and important that all tbe importations come in 
free of duty. Here the change redounds to the benefit of the 
domestic consumer. ~No articles continue to come in paying 
duty, and the remission is virtually the same as a general 
reduction or abolition of the duty. The effect is the same if 
the favor is granted to only one country, but that country is 
able to supply the entire consumption. If, for instance, by 
a treaty with Australia, wool from that country were admitted 
free, the effect would be the same as relieving fine wool en- 
tirely from duty. The amount of such wool raised in Aus- 
tralia is so great that all we should use would come in duty 
free ; the price would go down by the amount of the previous 
duty; the domestic purchasers of wool and eventually the 
domestic consumers of woolens would get their goods so 
much cheaper. 

The most important illustration of this effect of reciprocity 
treaties in recent times is to be found in the experience of 
European countries after the famous commercial treaty be- 
tween England and France. France, after having main- 
tained for centuries a rigid system of high duties, made a 
treaty with England, in 1860, by which English commodities 
were admitted at very moderate rates. England in return 
abolished entirely her duties on silks, and lowered her duties 
on French wines. The changes made by England were, from 
the first, of general application: all countries were free to 
take advantage of them. France, it is true, began by extend- 
ing her favors to England only. It is probable that even if 
they had never been extended to other countries, they would 
have worked like our supposed remission of duty on Ausr 
tralian wool, and not like our Hawaiian treaty. England 
would have been able to supply most of the goods in ample 
quantity, and the French consumers would have had the ben- 
efit of the remission. But any doubt on this point was set- 
tled by the prompt conclusion of treaties giving the same 



I 



Reciprocity 125 

favors to other countries — to Germany, Austria, Belgium, 
Italy, Switzerland, and so on. These countries were given 
the same favors as England, and in return conceded reduc- 
tion of duties on French goods. In effect, therefore, the ma- 
chinery of reciprocity led to the general application of a 
more liberal tariff system in France. Moreover, other coun- 
tries were led by the example of France to the same course. 
Germany (or, to speak accurately, the Zollverein), having 
concluded the treaty with France, soon made similar engage- 
ments with other countries; Austria, Belgium, Switzerland, 
Italy, followed suit; and in a few years after 1860 Europe 
was covered with a network of commercial treaties, bringing 
about a great moderation in the general tariff policy of all 
the continental countries. 

A more recent case of the same sort is to be found in the 
commercial treaties concluded by the German Empire during 
the present year. For one reason and another, France tired 
of the system of commercial treaties, and has just substituted 
for it a different regime, one not only of a distinctly pro- 
tectionist character, but involving a threat of higher duties on 
non-reciprocating countries, which is not very different from 
the sort of reciprocity just established by our own legislation. 
Oddly enough, at the very moment (1892) when France is 
thus dropping her commercial treaties, Germany is again 
entering that path. The recent treaties concluded with Aus- 
tria, Italy, Belgium, Switzerland, provide for reciprocal re- 
ductions of duties, which amount virtually to general reduc- 
tions and so redound to the benefit of the consumers in the 
respective countries. Thus, Germany lowers her duties on 
wheat and Indian corn, when imported from the treaty coun- 
tries ; but this reduction has already been extended to grain 
coming from the United States, and undoubtedly will soon 
be extended to Russian grain. Of the bearing of this latest 
move of Germany's on our own reciprocity scheme, more will 
be said presently. So far as German consumers are con- 



126 Free Trade, the Tariff and Reciprocity 

cerned, they will certainly get the benefit of the change : their 
bread will be cheaper. 

Obviously, the probabilities are strong that a remission 
of duties by way of commercial treaty or reciprocity will op- 
erate in this second way. Cases like our Hawaiian treaty 
are rare: a country will not often accept a loss of revenue, 
and transfer a gain to foreign producers, by remitting a duty 
on a portion only of its imports. Ordinarily, the remissions 
of duty by treaty to favored countries become, in fact, gen- 
eral remissions, and serve simply to make trade more free 
between a large number of countries. 

From this sketch of the character and working of the or- 
dinary form of reciprocity, we may turn to a consideration 
of the peculiar form adopted in our tariff act of 1890. Here 
the plan is not to remit a duty for countries granting favors, 
but to impose one for countries failing to grant them. A 
duty so imposed, like one remitted, may have very different 
effects, according to the conditions under which it is applied. 
As the remission of a duty may or may not operate for the 
benefit of the domestic consumer, so the imposition of a duty 
may or may not operate to his detriment. 

Suppose, for example, that a duty is imposed on coffee 
coming from Venezuela — a duty which has actually been 
imposed under the reciprocity provisions. The revolution in 
that country, as it happens, has complicated the effects of the 
measure ; but it is not difficult to see how it would work under 
undisturbed conditions. Venezuela supplies us in ordinary 
times with about one-tenth of the coffee we use. The re- 
mainder comes from other countries, chiefly from Brazil. If 
a duty were imposed on the Venezuela portion, the price, 
nevertheless, would not rise in the United States ; for Brazil 
coffee would still come in free, and somewhat more of it 
would quickly come this way if the price rose. The Ven- 
ezuelans must either sell their coffee to us at a price lower 
by the amount of the duty — i.e., they must pay the duty — 



Reciprocity 127 

or else must send their coffee to another market. The latter 
result would undoubtedly ensue. It might take time to form 
new trade connections, and might cause temporary loss to 
introduce their coffee to a new set of consumers ; and the em- 
barrassment, while it lasted, might be considerable. But it 
could hardly last very long ; and at all events this temporary 
loss would represent the effect of the measure on the non- 
reciprocating country. The American public would not be 
affected. 

The situation would be very different, however, if the 
duty were imposed on coffee coming from Brazil. The bulk 
of our coffee comes from that country, and it would be dif- 
ficult to secure the supply from other sources. Other coffee 
would indeed come in duty free; but it could not begin to 
supply our entire consumption. A duty on Brazilian coffee 
would cause the price to rise in the United States, and the 
American consumer would pay the tax. Of course, the price 
of all coffee would go up in the United States ■ — not only of 
the Brazilian article, but of any other of the same sort that 
might also come in. Producers in other countries would get 
the higher price of coffee, but their product would not be 
subject to the duty: the American consumer would be taxed 
for their benefit. The situation would be virtually the same 
as that under the Hawaiian treaty. If one indispensable 
part of the supply is taxed, the price of the whole supply 
goes up : those producers who are exempt — the Hawaiian 
sugar-planters in the actual case, the non-Brazilian coffee- 
planters in the supposed case — pocket the amount of the tax. 

In general, then, it may be said that a duty imposed under 
our reciprocity legislation will hurt the foreign producer — 
perhaps hurt him only for a time, but yet hurt him — if he 
does not furnish a very great part of our supply, and if other 
countries can easily step in his place. But if the foreign 
producer sends us the bulk of the supply, and if others can- 
not fill his place, the duty will tax the American public, 



128 Free Trade, the Tariff and Reciprocity 

and will put money into the pockets of other foreign pro- 
ducers. We have seen how a duty on coffee from Brazil 
would work. A duty on hides from the Argentine Republic 
would probably work in the same way. Our imported hides 
come in large part from that country, and a duty on them 
would raise their price here. A duty on sugar from Cuba 
would work, for a time at least, in the same way. It is true 
we are not so dependent on Cuba for sugar as we are on 
Brazil for coffee. Other countries contribute to our sugar 
supply, and could in time greatly increase their contributions. 
But Cuba is much the most important source of sugar for us, 
supplying a full third of the total imports; and a duty on 
Cuban sugar would cause the price of sugar to go up. After 
a while, no doubt, by a shifting of the sugar markets and 
perhaps some changes in production, other countries might 
send enough free sugar to us to supply our entire consump- 
tion, while Cuban sugar would go to England and to other 
countries not discriminating against it. But, at first, we 
should pay more for all our sugar; and some part of our 
extra payments would go to the countries, other than Cuba, 
from which our supplies come. 

Practically, however, we are hardly called on to consider 
the consequences of a duty on Brazilian coffee or on Cuban 
sugar. It it very improbable that sudi duties will be im- 
posed. The President is not likely to exercise his discre- 
tionary power in such a way as to bring about a tax on Amer- 
ican consumers, least of all a tax which would redound in 
part to the benefit of foreigners. With important countries, 
like Cuba and Brazil, a diplomatic use of the possibility of 
discriminating duties will be relied on. With the Argentine 
Republic the situation has been different. The financial con- 
dition of that country has made it out of the question to 
secure any lowering of its duties on American goods; yet 
no duty on its hides has been imposed, or is likely to be. 
Smaller countries can be brought to terms with ease. One 



Reciprocity 129 

can be played off against the other, and pressure can be 
brought to bear on them with little danger of hurting the do- 
mestic consumer. The only case of any importance in which 
a discriminating duty has in fact been imposed is that of Ven- 
ezuela, already referred to. 

So much as to the effect of the possible imposition of our 
duties on the American consumer and the foreign producer. 
But there is another important aspect of the reciprocity ques- 
tions — the effect on foreign countries of the concessions 
granted by them on American goods. How will these work ? 

We ask of other countries, in return for refraining from 
duties on their products, concessions of the usual sort — 
lower duties, or none at all, on American imports. We de- 
mand such favors chiefly from the countries of South Amer- 
ica and Central America. The very list of articles on which 
the reciprocity clause authorizes duties — coffee, tea, sugar, 
molasses, hides — points to these countries. The mention 
of tea, it is true, seems to indicate that some effort is to be 
made with China and India. But nothing has yet been done 
in that direction ; and, indeed, the conditions here are in any 
case such that a duty would prove a two-edged sword. There 
is one other region in which concessions have been sought 
and obtained, and of which a word may be said. The threat 
of imposing duties on beet-sugar from Germany and Aus- 
tria has been used to induce these countries to admit Amer- 
ican articles at the lower rates which these countries have 
granted, each to the other, by the treaties concluded in the 
present year, to which reference was made a moment ago. 
So far as Austria is concerned, these lower rates are nominal, 
since the articles affected are such as the United States never 
would export to Austria under any conditions. With Ger- 
many we get a more substantial concession. Some agri- 
cultural products, especially wheat, are admitted at the lower 
duties of the new treaty tariff. Clearly, the concession is 
one which it was for Germany' 3 own advantage to make* 



130 Free Trade, the Tariff and Reciprocity 

When Hungarian wheat was once admitted at a lower duty, 
it was best to admit American wheat also at the same rates. 
It was not difficult, therefore, to secure this favor from Gerr 
many in exchange for a promise to let German sugar alone. 

But, to repeat, it is the South American countries that 
the reciprocity scheme chiefly looks to ; and it is in the con- 
cessions granted by them that we are likely to find its most 
important effects. 

There are two sorts of goods which we may send to the 
South American countries: first, goods which we produce 
very cheaply and in great abundance; second, goods which 
we do not produce as cheaply as European countries. In 
the first class belong most agricultural products, especially 
breadstuffs and meats, and many manufactures, such as fur- 
niture, wooden ware, and most tools and implements. In 
the second class belong articles like woolens, linens, crude 
iron, and many miscellaneous manufactures. The reader 
will see at once that remissions of duties will have very dif- 
ferent effects on these two classes of goods. On articles of 
which breadstuffs are representative, lower duties in the 
South American countries will operate virtually as lower 
duties for all comers. In wheat, flour, meat products, the 
United States is the natural source of supply for Cuba, Bra- 
zil, and other countries. Lower duties or free admission will 
bring lower prices to the consumers in the South American 
countries, and will serve to enlarge the volume of trade be- 
tween them and the United States. That same holds good 
of those manufactured goods, not a few in number and im- 
portance, in which we have advantages in production. I have 
mentioned wooden ware and furniture : the list might be in- 
definitely extended. A wider range of international trade 
brought about in such articles will be advantageous to both 
countries. 

The advantage to the United States from such arrange- 
ments is almost always assumed, in current discussions, to be 



Reciprocity 131 

secured by the domestic producer of the exported article, and 
especially by the farmer. But both the extent and the dura- 
tion of any such advantage are much overrated. Its extent 
is overrated, because, after all, the volume of our trade with 
the South American countries is small, and is likely to re- 
main small. The bulk of our agricultural exports goes to 
Europe. Its duration is overrated, because any increase in 
foreign demand for our wheat and corn and meats is likely 
soon to be met by increased production at home, leaving the 
producer in about the same position as he was at the outset. 
The real and permanent gainers will be the consumers in both 
countries — the consumers of our breadstuffs and manufac- 
tures in South America, and our own consumers of the com- 
modities imported in exchange from South America or else- 
where. I fear it will be long before this mode of looking at 
the problems of international trade becomes accepted by the 
general public. The common notion is still that the great 
object of international trade is to sell, to dispose of the ex- 
ports. No doubt the process by which a gain in exports re- 
dounds to the advantage of the consumers of the imports is a 
less certain and unfailing one than the usual expositions of 
the Ricardian doctrine would lead one to suppose: here, as 
elsewhere, the machinery of trade works out its permanent 
and important results but slowly. Nevertheless, it is certain 
that the consumers of the imports are the persons who gain 
in the long run by an enlargement of international trade, 
whether secured by reciprocity or any other way. 

Looking now at the second class of goods on which South 
American countries may be asked to concede lower duties, we 
find different conditions. These are goods which the United 
States does not produce so cheaply as foreign countries. 
Here a remission of duties might cause a loss of revenue 
for Cuba and Brazil, without a gain to their consumers. 
American woolens, for instance, might make their way in at 
lower duties, and yet might be as dear as English woolens at 



132 Free Trade, the Tariff and Reciprocity 

higher duties. In such a case, the United States would be 
in the ungracious position of forcing a friendly power, by "a 
threat of duties on its goods, to make a concession which 
would involve a clear loss to its own citizens. But the case 
is not one likely to occur in practice. Goods of this sort have 
not been usually included in the list of articles on which, by 
the treaties recently concluded, duties have been lowered or 
abolished. The articles affected have been chiefly of the class 
described in the preceding paragraph — those which the 
United States produces abundantly and cheaply. Bread- 
stuffs have been by far the most important among them. The 
manufactured articles enumerated have in the main been such 
as we make to at least as good advantage as other countries. 
One possible exception of importance is in the case of cotton 
manufactures, which have been admitted at lower duties by 
some of the treaties, and which, in the qualities demanded by 
South American consumers, our New England manufacturers 
perhaps could not supply so cheaply as those of old England. 
It may be said, in passing, that cotton goods are, so to speak, 
on the line, the margin of difference in price between the 
American product and the European one being a very narrow 
one. In such cases, the choice of one product rather than 
of another is much affected by custom, tradition, the strong- 
hold of established connections. A reciprocity arrangement, 
giving the United States a preference in duties, might here 
shift the trade into American hands without causing any real 
disadvantage to the South American consumer. 

But such a change, merely from the reciprocity provisions, 
is not likely to take place, for another reason. Any lower- 
ing of duties which really redounds to the disadvantage of 
the domestic consumer is not likely to endure. Such reduc- 
tions are certain, sooner or later, to cease to be preferential: 
they will be given to all comers. As I have already said, a 
discrimination such as we gave the Hawaiian Islands, leading 
to Joss of revenue to the government and no cheapening in 



Reciprocity 133 

price to the public, is very exceptional. The experience of 
European countries shows that favors in duties soon cease to 
be favors, being given practically to all countries. The South 
American countries, so far as they make treaties giving the 
United States a real advantage over foreign competitors, 
will extend their provisions to foreign countries. And, 
surely, no generous-minded American would wish that it 
should be otherwise. Unless we regard international trade 
as a game in which each party tries to overreach the other, 
we must put our relations with foreign countries on a basis 
which insures a benefit from the exchange to all parties. 

The net result of the reciprocity arrangements, therefore, 
will probably be not to bring special gains to any particular 
sets of producers, but to enlarge a trifle the general volume 
of international trade, and so to diffuse more widely the bene- 
fits of the division of labor between nations. The gain to the 
United States will not be great in degree, simply because the 
volume of our trade with the South American countries is 
not large, nor likely for some time to become large. In kind, 
the gain will be of the same sort as would ensue if we lowered 
other duties or induced other countries to lower their duties 
still farther. The procurement of imported commodities in 
exchange for exports, which is the essential benefit of inter- 
national trade, is usually — I will not say always, but usu- 
ally — hampered to our detriment by protective duties. If 
reciprocity arrangements for lowering or abolishing duties on 
both sides are advantageous, a moderation of our protective 
duties may be expected to be also advantageous. 



VII 
COST OF PRODUCTION AND THE TARIFF 1 

The vogue of the plan of basing the tariff on differences in 
costs of production is a curious phenomenon, and a significant 
one. Much talked of as the plan has come to be, it is novel, 
at least in the United States. Only a faint suggestion of 
something of the sort appeared in the Republican platform of 
1904. Not until the presidential campaign of 1908 did it 
receive much attention. Then, and later in the debates on 
the tariff act of 1909, it came to be spoken of as the " true " 
principle of protection, the touchstone by which the justifica- 
tion of every duty was to be tested. What does it mean, and 
how far will it avail to " settle " the tariff question ? 

The doctrine has an engaging appearance of fairness. It 
seems to say, no favors, no undue rates. Offset the higher 
expenses of the American producer, put him in a position to 
meet the foreign competitor without being under a disadvan- 
tage, and then let the best man win. Conditions being thus 
equalized, the competition will become a fair one. Protected 
producers will get only the profit to which they are reason- 
ably entitled, and the domestic consumers are secured against 
prices which are unreasonable. 

In order to apply the principle, an enormous expenditure 
of money is necessary. Hundreds of thousands of dollars, 
even millions, must be spent in order to ascertain the costs 
of production at home and abroad of any considerable number 
among the protected articles. Moreover, no one who stops 
to think will suppose that inquiries of this sort will be easy, 

i The Atlantic Monthly, December, 1910. 

134 



Cost of Production and the Tariff 135 

or will lead to other than rough and approximate results. 
" Cost of production " is a slippery phrase. Costs differ in 
different establishments, and cannot be figured out accurately 
in any one establishment without an elaborate system of spe- 
cial accounts, such as few establishments keep. None the 
less, approximate figures are to be had. If the principle is 
sound, it will be of great service to have careful preparation 
for its application, and to reach the nearest approach to ac- 
curacy that the complexities of industry permit. To repeat 
— how far is it all worth while ? 

Frankly, the answer is that as a " solution " of the tariff 
question, this much paraded " true principle " is worthless. 
Applied with consistency, it would lead to the complete an- 
nihilation of foreign trade. It is usually thought of as likely 
to result in a moderation of protection. Yet, if carried out 
to the full, it would lead to the utmost extreme of protection. 

Consider for a moment what equalization of cost of pro- 
duction means. The higher the expenses of an American 
producer, and the greater the excess of the expenses incurred 
by him over those incurred by a foreign competitor, the higher 
the duty. Applied unflinchingly, this means that the pro- 
duction of any and every thing is to be encouraged — not 
only encouraged but enabled to hold its own. If the differ- 
ence in expenses, or cost, is great, the duty is to be high ; if 
the difference is small, the duty is to be low. Automatically, 
the duty goes up in proportion as the American cost is large. 
If the article is tea in South Carolina, for example, ascertain 
how much more expensive it is to grow the trees and prepare 
the leaves than it is in Ceylon, and put on a duty high 
enough to offset. If it is hemp in Kentucky, ascertain how 
much more expensive it is to grow it than in Eussia or in 
Yucatan (for the competing sisal), and equalize conditions 
with a high duty. 

It was on this ground — though, to be sure, with gross 
exaggeration as to the facts — that the duties on lemons and 



136 Free Trade, the Tariff and Reciprocity 

prunes were raised in the Payne-Aldrich tariff : equalize con- 
ditions for the California lemon-growers! If lemons in 
California, why not grapes in Maine ? They can be grown, 
if only the duties be made high enough. Obviously, the more 
unfavorable the conditions, the higher the duties must be. 
The climate of Maine is not favorable for grapes ; they would 
have to be grown in hot-houses. But make the duty high 
enough, handicap the foreign producer up to the point of 
complete equalization, and the grapes can be grown. So as 
to Kentucky hemp, or Massachusetts pig-iron. Make your 
duty high enough — and on this principle you must make 
your duty high enough — and anything in the world can be 
produced. The inevitable consequence is, however, that the 
more unsuited the conditions are for efficient and economical 
production, the greater will be your effort to bring about pro- 
tection. Under this equalizing principle, the worse the natu- 
ral conditions, the more extreme will be the height of pro- 
tection. 

No doubt the advocates of the principle will say that it is 
not to be pushed to such absurd consequences. But where 
draw the line? We have duties in our present tariff of fifty 
per cent, of seventy, or one hundred «and more, all of which 
are defended on this ground. Senator Aldrich remarked, in 
the course of the debates on the tariff act of 1909, that he 
would cheerfully vote for a duty of three hundred per cent, 
if it were necessary to equalize conditions for an American 
producer. 2 If for three hundred per cent, why not for five 

2 " If it costs ten cents to produce a razor in Germany and twenty 
cents in the United States, it will require one hundred per cent duty 
to equalize the conditions in the two countries. ... As far as I am 
concerned, I shall have no hesitancy in voting for a duty which will 
equalize conditions. ... If it was necessary, to equalize the conditions 
and to give the American producer a fair chance for competition, other 
things being equal of course, I would vote for three hundred per cent 
as cheerfully as I would for fifty." — Senator Aldrich, in the Congres- 
sional Record, May 17, 1909, p. 2182. 



Cost of Production and the Tariff 137 

hundred or one thousand per cent? Shall we say that the 
domestic producer whose costs are so high as to require a duty 
of thirty per cent is to be protected, but not he who has a 
disadvantage of fifty or a hundred per cent ? The only con- 
sistent answer is the Aldrich one — give him all lie needs for 
equalization. And the necessary consequence is universal 
and unlimited protection. 

It is for this simple reason that the principle seems to me 
worthless for settling the tariff problem. In reality, it begs 
the whole question at issue. That question is, how far shall 
domestic producers be encouraged to enter on industries in 
which they are unable to meet foreign competition? The 
very fact of their being unable to meet it shows that for some 
reason or other conditions are unfavorable. Domestic costs 
then are high ; domestic producers are under a disadvantage. 

The free-trader says that this is prima facie an indication 
that the industry had better not be carried on within the 
country at all. He says, further, that the greater the dis- 
advantage and the higher the domestic cost, the more probable 
that it is not now for the community's good, nor ever will be, 
to induce labor and capital to go into the industry by " equal- 
izing " the conditions. In so reasoning, the free-trader is 
very unmindful of political and social considerations, or even 
blind to some offsetting gains of a strictly economic kind. 
But his opponent, the protectionist, in setting forth the equal- 
izing notion as the " true " principle, does not answer him. 
This principle assumes at the very outset that any and every 
sort of domestic production is advantageous, and that there 
is no problem as to the limits within which we should act in 
bolstering up industries that cannot stand without legislative 
aid. 

Underlying the ready acceptance of this " true " principle 
are two widespread beliefs or prejudices, equally unfounded. 
One has just been alluded to — that \te domestic production 



138 Free Trade, the Tariff and Reciprocity 

of an article is in itself good. The other is that high wages 
are the result of the tariff, and cannot he kept up without the 
tariff. 

The belief that the production of a thing within the coun- 
try is in itself advantageous persists with extraordinary vital- 
ity. It runs counter to the universal teaching of economists, 
and on any careful reflection it is absurd. Yet it is main- 
tained — though by implication rather than expressly — in 
most of the current talk about the effects of duties. The 
tariff act of 1909, for example, raised some duties on cottons, 
with the object of causing the manufacture at home of fabrics 
previously imported. In the debates, the " acquisition " of 
the new industry was spoken of as manifestly desirable. The 
mere fact of the industry's being established at home was 
thought a proof of gain. So, when the duty on tin plates 
was raised in 1890, the domestic production of the plates was 
adduced as conclusive proof of the wisdom of the increase. 
The previous importation of these things was thought of as 
having been a losing business ; the ensuing production at home 
was supposed to bring so much national profit. 

The real question obviously is, which of the two ways of 
securing the goods is the better. To make a thing at home is 
not to our advantage if we make it at high cost. To import 
it is not a source of loss when we import the thing more 
cheaply than we can make it at home. These are the simplest 
commonplaces. Yet the " true " principle runs directly 
counter to thejn. It assumes that the nation gains necessar- 
ily by so equalizing conditions that anything and everything 
shall be made at home. 

On no subject is the difference between the economists and 
the general public, in point of view and in conclusions, more 
marked than on this of the nature of the gain from domestic 
and foreign supply. On other current topics the teachings 
of the economists are%istened to with attention and respect. 
On money and banking, on taxation, on labor matters, on the 



Cost of Production and the Tariff 139 

regulation of railways and other quasi-monopolistic indus- 
tries, public opinion is not out of accord with them, and has 
been markedly influenced by them. But on international 
trade and the tariff an attitude which seems obviously absurd 
to the trained student is tenaciously held by an immense num- 
ber of intelligent legislators and citizens. They repeat and 
repeat the ancient fallacies which regard imports as ominous 
and exports as wealth-bringing. 

The economists are by no means unanimous on the contro- 
versy between protection and free trade. There is hardly 
one among them who would not admit that there exist valid 
arguments for protection. But the grounds on which some 
economists go so far as to think the weight of argument to 
be in favor of protection, and others confess that there is at 
least something to be said for it, are very different from the 
grounds commonly put forward in our everyday tariff liter- 
ature. This sort of disagreement is unfortunate for them 
and for the community also. The public men of the domi- 
nant party have become almost fanatically intolerant. They 
dismiss, as "theoretical," propositions Which seem to the 
teachers and writers the simplest of common sense. Clear 
thinking and cool reasoning on all the great questions of the 
day are impeded by this disagreement on the very nature of 
international trade — on the fundamental question whether 
the domestic production of a given commodity is in itself 
necessarily advantageous to the country. 

The same disagreement appears, though perhaps in less 
overt manner, on the other belief which gives support to the 
equalizing principle of protection: namely, that wages in the 
United States are high because of the protective system, or 
at least cannot be kept high without it. The equalizing prin- 
ciple, in fact, may be said to be simply a revamped form of 
the pauper-labor argument. The American employer, it is 
said, finds himself compelled to pay h^her wages than the 
foreign employer. He is in danger of being undersold by the 



140 Free Trade, the Tariff and Reciprocity 

cheap product of pauper labor. He cannot hold his own un- 
less the foreigner is handicapped by duties. The belief that 
tariff duties are necessary to maintain a high level of wages 
is an article of faith for probably a majority of American 
citizens. Yet this also is opposed to the universal teaching 
of economists. 

Consider, for a moment, the case of exported articles. 
They are not higher in price than similar articles in foreign 
countries. They must be, in the United States, somewhat 
lower in price — lower by the cost of transportation — or 
else they could not be sold abroad. Occasionally an article is 
" dumped/' that is, sold abroad at a less price than is got 
for it at home. But this is exceptional. The immense mass 
of things we export — raw cotton and the cheaper cotton 
textiles, bread-stuffs, meat-products, machinery, woodenware, 
glassware, shoes, and so on — are cheaper, quality for qual- 
ity, than similar things in foreign countries. Yet they are 
made with high-priced labor. How can they be sold cheap, 
when high wages are paid to those who make them? The 
answer is simple enough. The labor is effective. You can 
pay high wages and yet sell cheap, if much is turned out by 
your men. 

It is a familiar adage in the business world that an efficient 
man is cheap at high wages. Yet in its application to larger 
questions this adage is never thought of. In discussing the 
tariff and wages, people assume as a matter of course that the 
employer who pays high wages must therefore sell his goods 
at a higher price. The fact is that if the labor is well-fed 
and intelligent, and is applied under good natural conditions 
and with skillful leadership, the employer can turn out an 
abundant product (or a product of high quality), sell it cheap, 
and still pay his laborers well. And the real source and 
cause of general high wages, says the economist, is precisely 
in these conditions: MScient labor, good natural resources, 
skillful industrial leadership. Given these, you will always 



Cost of Production and the Tariff 141 

have higher wages, and need not fear competition from cheap 
and inefficient labor. 

Further, says the economist, when you try to equalize 
costs of production everywhere, you induce the employer to 
turn to industries where labor is not efficient. The very 
fact that costs are high indicates that there is some cause of 
inefficiency. You divert labor and capital from the indus- 
tries that are best worth while, diminish the general product, 
and so diminish the source from which all the wages even- 
tually come. The argument goes back to the position stated 
a moment ago: domestic production under any and all cir- 
cumstances is not necessarily good; that domestic production 
is good which is carried on under advantageous conditions. 

I will not enter on some forms of the labor argument that 
are complicated, and lead to more intricate problems. The 
great broad facts of the case are, in the eye of the economist, 
plain. No respectable writer or teacher would say for a 
moment that high wages are due to the tariff, or that the 
maintenance of a high range of general wages (observe, we 
speak of general wages) is dependent on the tariff. The 
main cause of generous wages is at bottom a very simple one : 
generous productiveness of industry. This makes possible 
the combination of money wages that are higher than in 
other countries with prices that are as low as in other coun- 
tries or lower. Given the all-round efficiency of industry 
that leads to this happy combination, and you may dismiss 
all fear of being undersold and ruined by the competition 
of pauper labor. Here again the judgment of the well- 
trained and thoughtful differs irreconcilably with that domi- 
nant in the nation's councils. 

From all this it might seem to follow that inquiries about 
relative cost of production, money-rates of wages, equalization 
of condition, are not worth while at ajl. They cannot touch 
the heart of the tariff problem: this really is whether it is 






14:2 Free Trade, the Tariff and Reciprocity 

desirable to try to equalize at all. And yet ! I believe that 
such inquiries are well worth while. They will conduce to 
a better understanding of the tariff situation, and are likely 
to lead to considerable improvements in legislation. They 
may even pave the way to something like a settlement of the 
tariff question. 

In two directions the investigation of relative costs of 
production may be of advantage: as to undue gains in mo- 
nopolistic or quasi-monopolistic industries; and as to the 
extent to which there are vested interests which must be 
respected in a future settlement of the tariff. 

The protectionists usually assume that domestic competi- 
tion will prevent any excessive profits in the protected indus- 
tries. In most cases they are probably right. In the cotton 
manufacture, for example, where there is no trust, no com- 
bination, no monopoly, high duties are not the cause of per- 
manent high profits. In the debates on the tariff act of 1909, 
certain insurgent senators among the Republicans protested, 
and with reason, against some advances in the rates on cotton 
goods ; but they took untenable ground in putting their argu- 
ment on the basis of monopolies and monopoly profits. It is 
true that when a new duty on such an article is imposed, 
those who first undertake the domestic manufacture may 
make large profits. But competition in due time sets in. If 
exceptional gains do prove to be permanently maintained, it 
must be because some mills have better organization and 
management than others, or shrewder judgment as to the 
caprices of fashion. So it is in the woolen manufacture 
(even though here there is much more of combination than 
in the case of cottons), in the silk manufacture, and so on. 
The real question in such cases is whether it is worth while 
to encourage a domestic industry if costs of production are 
so large that duties of sixty, eighty, one hundred per cent 
are called for. Most branches of the textile industries need 
no duties as high as these in order to enable them to hold 



Cost of Production and the Tariff 152T 

their own. Many can hold their own without any duties at 
all. But certain branches, especially in the finer grades, 
clamorously ask for extremely high rates; and then their 
case is suspicious, not because of impending monopoly profits, 
but because of the presumption that they had better not be 
established at all. 

All the world knows, however, that combination and 
monopoly, though they are not in possession of the entire 
field of industry, have secured control of large sections of it ; 
no doubt tempered more or less by potential or actual compe- 
tition, but still with such degree of success that more than 
competitive profits are secured. Where this is the case, tariff 
duties may bolster up the profits, by shutting out at least the 
foreign competitors. Then the protective system really 
serves to rob Peter in order to enrich Paul; whereas, under 
competitive conditions, it only robs Peter in order to sustain 
Paul in an unsuitable industry. If the duties more than off- 
set Paul's costs of production (assuming these costs to be in 
fact higher), they give a chance for a monopoly squeeze. 
Now whether they do so, inquiries on the facts of the par- 
ticular case may make clear. The vogue of the " true " prin- 
ciple of protection is unquestionably promoted by a wide- 
spread feeling that duties are more than enough for equaliza- 
tion, and that they enable the trusts to secure more than rea- 
sonable profits. The suspicion is doubtless well-founded in 
many cases; how far so, systematic inquiry alone can bring 
out. 

Again, no rational person, even though he were the most 
radical free-trader, would propose to abolish at one fell swoop 
protective duties to which a great industrial system had ac- 
commodated itself. We may not like the result, but it is 
there, and not to be suddenly modified without widespread 
loss. Moreover, those engaged in the industries may plead 
with weight that they have entered on their operations with 
the sanction of the government, nay, with its direct encourage- 



144 Free Trade, tide Tariff and Reciprocity 

ment, and that the government cannot in justice leave them 
in the lurch. Thus, our Department of Agriculture has been 
preaching beet sugar for the last fifteen years, urging farmers 
and manufacturers to undertake it, supplying not only seeds 
and agricultural instructions, but directions as to manufac- 
turing. In the arid and semi-arid regions of such states as 
California, Colorado, Utah, beet-growing (with sugar-mak- 
ing) seems to have an independent basis ; but in the states of 
the corn-belt, Michigan, for example, it rests on the un- 
stable prop of the tariff. The Michigan sugar-makers, egged 
on as they have been by the government, have a claim on the 
ground of vested interest. We are not free to deal with the 
sugar duty as we were twenty years ago ; nor indeed are we 
free to deal radically with any of the protective duties needed 
for the maintenance of established industries. 

But the question always arises : How far are vested inter- 
ests in fact involved ? How high must the duties really be in 
order to enable the status quo to be maintained? On this 
topic I believe there is an enormous amount of exaggeration. 
Probably the greater part of our existing duties are needlessly 
high, on the very principle of equalization. This is the case 
not only with the obviously nominal duties on wheat, corn, 
oats — articles regularly exported, and as cheap here as 
abroad — but with those on many manufactured articles, such 
as most grades of cottons, almost all boots and shoes, furni- 
ture and woodenware, iron in crude and manufactured form, 
glassware, and a host of miscellaneous manufactures. 

The dependence of our manufacturing industries on tariff 
duties, to repeat, is enormously exaggerated. The constant 
shouting about foreign pauper labor has brought about a 
state of pusillanimity among the manufacturers themselves. 
Most of them know virtually nothing about foreign condi- 
tions. They are familiar only with their own business and 
with that which touches their daily routine. Foreign com- 
petition has been non-existent for years. What its real pos- 



Cost of Production and the Tariff 145 

sibilities are, they do not know. But the politicians, and 
those few shrewder manufacturers who have cleverly formed 
plans for aid to special industries, have incessantly predicted 
wholesale ruin unless the tariff system were maintained with- 
out the change of a dot. I know of a case in which the super- 
intendent of a textile mill, an Englishman who had had ex- 
perience both in his native country and here, told an in- 
quirer that goods could be turned out by the mill quite as 
cheaply in the United States as in England; whereas the 
owner told the same inquirer on the same day that the mill 
would have to be shut up within twenty-four hours if the 
tariff were touched. Like thousands of manufacturers, this 
owner was in a state of ignorant panic about foreign com- 
petition. 

A searching inquiry would show, I am convinced, that our 
present system of extremely high duties could be greatly 
pruned without any disturbance of vested interests. The 
direct effect of such a change would be, no doubt, more nomi- 
nal than real. Except in the case of trust-controlled articles 
(and there are not so many of these raised in price by the 
tariff as the free-traders commonly suppose), a reduction of 
duties on this basis would bring no lowering in prices and no 
advantage to consumers. It would mean only the placing of 
a new set of figures on the statute-book. But it would have 
some important advantages none the less, and very likely 
some considerable ulterior consequences. 

One great gain from such an overhauling of the tariff would 
be to lessen its importance in the public mind. To the econ- 
omist nothing is more nauseating than the cry about pros- 
perity and the tariff. Erom much of the current campaign 
talk, one would suppose that the country would go to certain 
ruin if a single duty were reduced by a fraction of a per cent. 
Manufacturing industries in general are in the main not 
dependent on protection. This country of ours is certain to 
be a great manufacturing one under any tariff system. 



146 Free Trade, the Tariff and Reciprocity 

Still less is our general prosperity dependent on the tariff. 
Our natural resources, our vigor, industry and intelligence, 
our training in school and college and shop, the enterprise 
and judgment of our business leaders — these are the things 
on which material welfare depends. Great harm has been 
done by the persistent stress on legislation, and especially on 
restrictive legislation, as the mainstay of prosperity. Our 
manufacturers and other producers need to learn to keep cool 
and to rely on their enterprise and skill. 

Further, a readjustment of duties simply on the basis of 
equalization — that is, on the basis of conserving vested in- 
terests and maintaining industries as they are — would lead 
to a more critical attitude on the tariff question. It would 
be seen that a great range of industries could get on with 
duties much moderated or no duties at all. Others would be 
shown to need high duties in order to maintain themselves. 
Such differences, resting on the varying disadvantages of the 
several industries, would hardly fail to raise the question - — 
which sorts of industries are, after all, the better for the 
country, those whose costs are high, or those whose costs are 
low ? If there are plenty of manufactures which can get on 
with low duties or none at all, is it worth while to start up 
others which need high duties ? Suppose it to be admitted 
that we must continue to prop up for an indefinite time those 
which now need high rates, shall we encourage new ones 
which demand still higher rates in order to equalize their 
costs of production? 

I am by no means sure that questions of this sort would be 
coolly asked or would be rationally considered. The pro- 
tective notions in their cruder form have a most tenacious 
hold, especially that notion of the inherent advantage of " ac- 
quiring " any and every industry at home. Yet a system of 
duties really adjusted with care and precision on the basis of 
cost of production might be expected to help, not only in 



Cost of Production and the Tariff 147 

sharper scrutiny, but in more discriminating judgment on 
the whole tariff problem. 

What has been said in the preceding paragraphs rests on 
a free-trade basis; that is, it rests on the assumption that it 
is good for a country, not to produce anything and everything 
at home, but to allow a process of selection or experiment in 
determining which among the various possible industries are 
the best for it. 

I would not have the reader infer that I am an unqualified 
free-trader, or that this view of the tariff problem leads im- 
mediately, or even ultimately, to complete abolition of all 
except revenue duties. The case in favor of free trade has 
indeed always seemed to me prima facie strong; and pro- 
longed investigation and reflection have served to confirm me 
in this opinion. But it is only a prima^facie case. There 
may be offsetting advantages which rebut the presumption. 
A consideration of these calls for some very delicate balancing 
of losses and gains. It would be necessary to consider the 
young-industries argument, which used to be the mainstay 
of the protectionist, and now is pooh-poohed by their op- 
ponents, but seems to me still to point to some possibilities of 
ultimate gain. Again, there are political and social argu- 
ments as to the avoidance of extremes and of undue fluctua- 
tions in industry. Few economists nowadays would say that 
there is one good tariff policy, and one only, applicable to all 
countries and all conditions. 

But few economists would say a good word for such an 
exaggerated protectionist policy, one so intolerant of foreign 
competition and foreign supply, as the United States followed 
in the McKinley tariff of 1890, in the Dingley tariff of 1897, 
and in the Payne-Aldrich tariff of 1909. When duties of 
fifty, eighty, and one hundred per cent come to be looked 
upon as normal protectionist rates; when ingenious devices 



148 Free Trade, the Tariff and Reciprocity 

and " jokers " are resorted to in order to bring about such 
high rates without its being made plain that this is the thing 
really aimed at and accomplished; when by the log-rolling 
process the policy comes to be applied indiscriminately to any 
and every article, without scrutiny of the possibility of ulti- 
mate cheapening or the promise of social or political gain — 
then it is time to call a halt, and to begin a process of 
thorough overhauling. This is the point of view not only of 
the teachers and trained students of economics, but, I feel 
sure, of the immense majority of cool-headed and sensible 
people in this country. 

Adam Smith — an ardent though by no means unqualified 
free-trader — thought in 1776 that the adoption of a free- 
trade policy by Great Britain was quite beyond the bounds 
of possibility. Had Adam Smith lived to see what changes 
took place in the course of the century following, he would 
probably have said in 1876 that free trade would never be 
abandoned by any country which had once adopted it. Who 
would venture on a prediction now ? It is among the possi- 
bilities that Great Britain herself will turn again to some sort 
of restrictive trade policy. I would not undertake to fore- 
tell whether free trade will be abandoned in Great Britain, or 
protection in the United States. But the outlook is certainly 
for a moderation of extreme protectionist policies. The 
various nations which have stirred each other to measures of 
commercial warfare — and the United States has been most 
aggressively guilty in this regard — seem to be wearying of a 
game which each can play with effect against the other. 

The indications are for some sort of compromise all 
around; an illogical proceeding, perhaps, but a very human 
one. In this moderated course of action the United States is 
likely to join; and all sorts of persons, whatever their opin- 
ions (or lack of opinions) as to the goal ultimately to be 
reached, will think and vote in favor of pruning a protection- 
ist system which has become so rigidly and intolerantly re- 
strictive as ours. 



VIII 

AN" INQUIRY ON THE COSTS OF WOOL AND 
OF WOOLENS x 

The Tariff Board Report on Wool and Woolens fills four 
volumes, 1200 pages in all. It contains a mass of valuable 
information. Even those who have followed the previous 
literature on the subject, official and unofficial, cannot fail to 
find here new and helpful material. Whatever be the serv- 
iceability of the report toward settling legislation, its useful- 
ness to the honest-minded inquirer cannot be doubted. 

The matter of the report divides itself into two parts, one 
on wool, the other on the manufactures of wool. The former 
of these is distinctly more satisfactory than the latter. The 
passages on wool are well arranged, well put together, well 
indexed, well summarized. Those on woolens have much 
more the appearance of being thrown together with some 
haste, and it is not easy to make out what the results finally 
come to. The less satisfactory character of the report as 
regards woolens is probably due to haste in preparation. It 
was long obvious that the Administration desired to present 
to Congress a specimen of the kind of work which the Tariff 
Board was doing. There was pressure to have at least one 
important report ready early in the session of Congress, and 
the Board doubtless was called upon to show its hand before 
it was ready. 

In the report on wool, as in all of the inquiries of the 

i American Economic Review, June, 1912. The reader should bear in 
mind that the Tariff Board whose work is here discussed is that which 
was established by President Taft in 1910 and was abolished in 1912. 
It is not the Tariff Commission created by Congress in 1916. 

149 



150 Free Trade, the Tariff and Reciprocity 

Tariff Board, costs of production in the United States and in 
foreign countries figure largely. The theory on which the 
Board was set to work has been that " scientific " tariff revi- 
sion should rest upon ascertained differences between cost in 
the United States and in foreign countries. An investigation 
of this sort, however, in the case of commodities of the ex- 
tractive group, is beset by difficulties, obvious enough to the 
economist. Costs vary according to the nature of the sources 
of supply. Some localities have advantages over others, 
some produce more cheaply than others. Which cost shall be 
taken as decisive or representative, the highest or lowest ? In 
the case of wool this difficulty is increased by further compli- 
cations. Wool is a joint product with mutton, and wool and 
mutton together are often joint products of general farming. 
How disentangle a separate cost of wool ? 

The mode in which the Tariff Board has grappled with the 
problem is instructive ; and it seems to me to have been well 
chosen. " Cost " of wool is reckoned by first ascertaining the 
total flock cost — that is, the expenses directly incurred by 
the farmer for his sheep in the way of food, care, shelter. 
The Tariff Board has wisely disregarded the land in reckon- 
ing this cost. In the statements presented at hearings before 
congressional committees, interest on the value of the land 
is usually reckoned, not only with regard to wool but with 
regard to wheat and other staples, as part of the cost of pro- 
duction of agricultural produce. Whether or not influenced 
by considerations of economic theory, the Tariff Board has 
thrown out this item, without stopping to consider niceties 
about the significance of rent on land. The direct cost alone 
is considered. From this direct cost there are deducted all 
receipts from other sources than wool; that is, mainly the 
mutton receipts. The difference is then taken to represent 
the separate cost of the wool. 2 

2 The reader interested in economic theory may compare the procedure 
with that suggested by Professor Marshall in his " Principles of Eco- 
nomics," bk. V, ch. 6, section 4, note 2 (p. 388, sixth ed.). 



An Inquiry on the Costs of Wool and of Woolens 151 

The cost of wool thus ascertained shows extraordinary di- 
vergences in different parts of the United States. Three 
great regions are distinguished and for these the following 
general results are stated : 

Number Cost 
of sheep of wool 

1. The region of general farming, extending 

from the Missouri River eastward over 

almost the whole of the country 10,000,000 nil 

2. The territory or range region 35,000,000 11 cents 

3. Ohio region 5,000,000 19 " 

These figures of "cost," as the Board emphasizes, are of a 
very rough sort, indicating the general situation in the several 
regions. They are averages. Within each region there are 
great differences. Even if these be neglected, the general 
figures indicate how extraordinarily diverse are the condi- 
tions in different parts of the country. 

In the first region, that of " general farming," the con- 
clusion that the cost of wool is nil means simply that the 
direct expenses of farmers on account of their sheep are met 
usually by the receipts from mutton. Sheep are kept in 
small numbers on each farm ; their keep costs very little ; they 
are almost always crossbreds — that is, of the breeds yielding 
good lamb and mutton. Even what the farmer gets from 
the mutton is usually so much net gain. Certainly what he 
gets for the wool cannot be said to cost him anything. In 
other words, in this region, sheep-raising and wool-growing 
would be maintained irrespective of any duty upon wool. 
Abolition of the duty would mean, at the most, that even more 
attention than at present would be given to the muttou-yield- 
ing breeds of sheep. 

In the territory region, where much the largest part of the 
wool-growing takes place, the situation is different. Within 
that region there are again greatly varying conditions. The 
Tariff Board divides it into three sub-regions : a Southwestern 



152 Free Trade, the Tariff and Reciprocity 

district, including Texas, Arizona, New Mexico, and the like ; 
a California district ; and a Northwestern district, including 
Idaho, Washington, Oregon, and the rest of the Northwestern 
states. These three districts, however, can be reduced to two ; 
the southern part of California is similar to the first of them, 
the northern to the third. In the first the conditions seem 
to have much similarity to those in Australia* The climate 
is mild ; no winter shelter is needed. The meager precipita- 
tion, which imposes an almost insuperable obstacle to cattle 
raising, presents none so serious to sheep-growing. The 
sheep are mostly of merino breed, hardy and easily herded. 
They are kept chiefly for wool. Cost of production is lower 
here than in any part of the United States, and very likely 
as low as in competing foreign countries. In the Northwest, 
on the other hand, the climatic factors influence both the ex- 
pense of wool-growing and the character of the flocks. More 
winter shelter is needed and more harvested crops. There is 
a tendency to cross-breds, and mutton is looked to for a con- 
siderable part of the revenue, either directly or by the sale 
of sheep for fattening in the corn-growing region. Harvested 
crops are resorted to in considerable degree. 

Not less important is the circumstance that wherever set- 
tled agriculture is possible, either from sufficient local pre- 
cipitation or through irrigation, farming treads on the heels 
of wool-growing. This phenomenon, constant in the eco- 
nomic history of the United States, is now unmistakably to 
be seen in the West and Northwest. In Texas the number 
of ■ sheep has declined as the eastern part of the state has been 
settled by farmers. The same has been the case in those 
parts of California which have been put under the plow or 
converted into orchards. It is certain that Washington and 
Oregon will not long remain important ranching states. 
Throughout Idaho, Montana, and Wyoming, wherever irriga- 
tion or dry farming is possible, the flocks of sheep will pass 
away. Only in those regions which because of their limited 



An Inquiry on the Costs of Wool and of Woolens 153 

water supply are necessarily pastoral will ranching maintain 
itself. And even in these, cattle are likely to be more profit- 
able than sheep. This general tendency is showing itself in a 
steadily increasing " cost of production " for sheep and wool ; 
and it brings it about that within this region itself there are 
differences in the facilities and profitableness of sheep-raising 
as great as those in widely separated parts of the United 
States. 

Finally, in the third and smallest region of all, we find 
the highest cost and the most peculiar conditions of produc- 
tion. In eastern Ohio and in near-lying parts of Pennsyl- 
vania and West Virginia, and in some parts of Michigan, 
there is a sort of enclave in which sheep-raising seems to be 
carried on with an approach to obstinacy. Industrially of 
little consequence, it has been politically of surprising in- 
fluence; for it long contributed more than any other section 
of the country toward the maintenance of wool duties and so 
of the general protective system. Here large flocks of merino 
sheep are kept by Ohio farmers on land that is hilly, easily 
eroded, and not adaptable to the agricultural methods com- 
mon in the Mississippi Valley. It is true that in some parts 
of this region the farmers have turned their attention to 
mutton breeds of sheep and therein have found profit in the 
same way as other farmers of the central region. But it is 
not difficult to read between the lines in the Board's noncom- 
mittal pages that there is some stolid persistence in old prac- 
tices, perhaps also some insuperable difficulty in the way of 
using the land otherwise. 3 At all events, here we find the 

3 I quote some passages referring to the (i Upper Ohio Valley region " : 
" Some farms produce lambs that are sold fat after feeding them a 
greater or less time in the fall and winter. A flock managed in this 
way returns usually a good amount from its lamb sales, so much that 
the charge against wool is often entirely met. On such a farm the 
wool is not considered the chief source of income. Much as in England 
it is a side product — more important, proportionally, than in England ; 
yet from the fat lambs comes the greater return. It is rare that sheep 



154 Free Trade, the Tariff and Reciprocity 

highest cost of wool, and on that basis the greatest need for 
protection. 

Such are the facts stated. What light now do the results 
of the whole investigation throw on the expediency of main- 
taining the duty on wool, or on the rate of duty which should 
be levied, if one is to be maintained? I confess that the 
situation seems to be in no sensible degree cleared up for the 
legislator. So far as the general expediency of the duty on 
wool is concerned, he must still reach his conclusion upon 
general principles. If he thinks that there is something 
precious in the domestic wool supply, and something porten- 
tous in a considerable increase of imports, he must still be in 
favor of retaining a considerable duty. If he has any such 
beliefs as are embodied in the young industries argument — 
if he thinks a duty should be maintained only if it will lead 
eventually to supply of the entire domestic consumption by 
domestic producers, at prices not higher than those in foreign 
countries — then he must give up once for all any hope of 
attaining the desired end as regards wool. It is proved to 
the hilt that the possibility of extending the domestic supply, 
outside of the region of general farming, is negligible. Sheep 

farms managed skillfully on this system do not show some profit. The 
question may be asked, Why, then, do not all of the sheep breeders of the 
Ohio Valley and Michigan follow this system? The answer is that on 
hill farms especially it is not easy to grow the corn necessary to fatten 
lambs. Then, the owners of many flocks have not yet learned to adapt 
their systems of agriculture to this practice; they have long been ac- 
customed to looking to wool for their chief profit from sheep-breeding M 
(p. 548). 

" From the foregoing it seems important for the sheep farmers of the 
hill regions of Ohio, Pennsylvania, and West Virginia to seek wherever 
possible to produce fat lambs as an effective means of abating their 
wool costs. There are, however, certain difficulties, some of them seri- 
ous, in the way. In much of the region in question the plow is of little 
use. The hillsides are too steep for cultivation. The land readily 
erodes, and there is never a surplus of corn nor even always a suffi- 
ciency of hay. Before growers here can adopt new methods they must 
buy corn, and this often at high prices, and as they are not accustomed 
to speculation, this would not appeal to them " ( p. 550 ) . 



An Inquiry on the Costs of Wool and of Woolens 155 

raising in large herds is certain to become less rather than 
greater. The retention or increase of the duty may con- 
ceivably aid in maintaining the supply at its present figure, 
but it can bring about no considerable increase. All this, 
however, was known before. The report simply confirms the 
conclusion already reached by well-informed inquiries. 4 

For myself, everything in the report strengthens the con- 
viction which I have long held and declared, that there is no 
good ground for maintaining a duty upon wool. But that 
conclusion rests upon general reasoning with regard to the 
working of international trade and of protective duties, which 
may indeed find illustration in the working of our wool 
duties, but which is neither reached nor confirmed by all such 
labored investigation. The strength of the wool duty lies 
not in economic reasoning, but in the inevitable wish of every 
industry in every part of the country to get its share of what 
seem to be the benefits of protection. It is absurd for the 
wheat-growers to protest against the abolition of a wheat duty 
which is of no consequence to them. But all the current talk 
about protection makes them think that they are losing their 
" share " of the benefits. Even more strongly the wool- 
growers feel that they are entitled to their " share " of the 
benefits of protection. Under such circumstances the in- 
vestigation of the Tariff Board supplies ammunition for either 
party, but will not enable either to rout the other. 

Again, supposing that there is to be a duty on wool, what 
rate shall be imposed? Shall it be a rate sufficient to pro- 
tect the obstinate grower of merino wool, or the grower of 
the Southwest, or the waning pastoral industry of the North- 
west? I know no ground upon which one or the other of 
these costs of production should be accepted as decisive. 
Here, as elsewhere, if you give a duty high enough to equal- 
ize cost of production for the producer having greatest ex- 

*It has been proved, for example, beyond question in the pages of 
Professor Wright's " Wool Growing and the Tariff." 



156 Free Trade, the Tariff and Reciprocity 

pense, you give more than enough for the one who has less 
expense. If you give a duty sufficient only for the producer 
whose expense is least, you reach a free wool basis, and at all 
events sacrifice some of the producers less advantageously 
situated. 

There remains one subject, however, on which the Board's 
report states less uncertain conclusions — the mode in which 
a duty upon wool, if levied at all, should be assessed. The 
Board recommends unqualifiedly that any duty should be 
reckoned hereafter upon the scoured content of the wool. As 
every one who has dealt with the subject knows, raw wool 
varies immensely as regards the impurities which it contains. 
Some wool loses three-fourths or four-fifths of its weight in 
scouring and preparation for manufacture. Other wool loses 
but one-fif th or one-fourth of its weight. The present specific 
duty (that of the tariff of 1909) of eleven cents a pound upon 
raw wool necessarily bears more heavily on that which shrinks 
most in scouring and loses most in manufacture ; and it has 
proved virtually prohibitive of the importation of some 
grades of wool, especially those which come from the Argen- 
tine region. This anomaly has long been recognized; the 
only question has been on the best mode of readjustment. 
One remedy is to impose the duty upon an ad valorem basis; 
the other is to impose it according to the quantity of scoured 
wool contained in the fleece. Space lacks for entering on a 
detailed consideration of the merits of these propositions. 
The scoured basis seems to be not impossible of reasonably ac- 
curate application, but is open to the objection that, like any 
specific duty, it bears with greater relative weight on coarse 
wools than on fine wools. The ad valorem method avoids 
this difficulty, but is open to objections of its own. Under- 
valuation is always tempted and is always hard to control; 
and a duty by value tends to exaggerate the fluctuations in 
domestic market prices. Yet it is to be said that both these 
difficulties become less in proportion as the ad valorem rate 



An Inquiry on the Costs of Wool and of Woolens 157 

is lower; they would be serious with a rate as high as 50 per 
cent (roughly the equivalent of the present duty), but neg- 
ligible with one of 10 per cent. The Tariff Board's recom- 
mendation of the second method — a duty on scoured basis — 
bears every evidence of having been reached after careful and 
unbiased consideration. Either method would be better than 
the present. But there is only one plan which gets rid of 
the objections — the good and simple plan of admitting wool 
free once for all. 

With regard to woolens the situation is in one important 
respect essentially different. Here there would seem to be 
no inherent difficulty in making comparisons of cost produc- 
tion. Manufacturing industries are not necessarily carried 
on under conditions of varying cost. Is it not possible to 
ascertain with reasonable accuracy the difference between 
cost of production of woolens within the country and without 
the country ? 

To this suggestion it has often been answered that we find 
in manufactures differences of cost no less great than in the 
extractive industries. Cost is not uniform within a country, 
any more than it is uniform between countries. Some estab- 
lishments in the United States produce more cheaply than 
others; we encounter here, as with regard to wool, the diffi- 
culty of ascertaining which among varying costs of produc- 
tion is to be decisive in regulating tariff rates. The diffi- 
culty seems to me not insuperable ; yet the method by which 
it might be most successfully met has not been followed, at 
least with any consistency, in the Tariff Board's report. To 
remove it, resort must be made to something like Professor 
Marshall's device of the " representative firm." Though 
there be differences in facilities between different establish- 
ments in the United States, it is not unreasonable to disre- 
gard those managed with unusual ability and also those neg- 
ligible because backward or still in the early and experimen- 



158 Free Trade, the Tariff and Reciprocity 

tal stage. The device calls, no doubt, for some artificis 
tion of the data : the construction of an imaginary establish- 
ment, not perhaps corresponding precisely to any specific 
business, yet fairly to be regarded as indicative of the normal 
conditions of the trade. The Tariff Board, however, has 
not chosen to adopt any method of this kind. Its pages are 
full of detailed statements of cost, chiefly for establishments 
in the United States, but for some establishments in Euro- 
pean countries also. Yet these inquiries seem never to be 
brought to a form in which direct and complete comparison 
is possible, or in which clear-cut results are stated. Possibly 
this may be due to the fact, already referred to, that the pub- 
lication of the Board's report was called for before its work 
had been carried to the final stages. Possibly it may be due 
to a hesitancy on the Board's part in presenting anything but 
specific, concrete facts. No doubt there would have been 
severe criticism of hypothetical or generalized figures. 'No 
doubt, also, such figures could indicate only the general trend 
of the differences between countries. But approximate solu- 
tions on matters of this kind are the only ones obtainable. I 
cannot but believe that legislation on the lines expected from 
the Tariff Board's report would have been facilitated by 
statements which, though representative and therefore ap- 
proximate, were in simple and summary form. 

At all events the legislator who is endeavoring to apply the 
cos>t of production theory to the revision of the duties on 
woolens will find it necessary to do much digging of his own 
into the voluminous pages of the Tariff Board's report. He 
will find abundant proof that the duties as they stand now 
are not fixed on the basis of differences in cost of production 
with any approach to accuracy. But just what duties would 
conform to these differences, he will not find it easy to make 
out. 

On one important topic, however, a perfectly clear result is 
reached. It is established beyond question that the compen- 



An Inquiry on the Costs of Wool and of Woolens 159 

sating system is completely out of gear. 5 In this result I 
take some personal satisfaction. I have maintained for 
years that it has been incorrect and in need of complete over- 
hauling. Persons like myself, when making statements of 
this sort, have been dubbed theorists, ignorant of the actual 
working of the system. The system itself has been lauded as 
perfect by those who may be presumed to be most fully con- 
versant with it. The Board's report, however, makes it clear 
that the compensating duties much more than compensate. 
Those who have maintained that, in the guise of compensa- 
tion for the wool duty, the rates on woolens have been higher 
than they purported to be, find full support. Those who have 
endorsed the compensating system as it stands and have pro- 
tested against even the slightest change in it, surely have 
followed a mistaken policy. It is inevitable that suspicion 
should attach to the utterances of persons who have persist- 
ently contended that things were true which are now proved 
not to be true. ~No doubt the fear of the wool-growers and 
manufacturers that even the slightest change in Schedule K 
might precipitate the complete collapse of the system, ex- 
plains their insistence that it was without flaw. None the 
less, in view of the present unanswerable demonstration 
that the system needs thorough overhauling, their attitude 
must be judged to have been impolitic. 

On some other subjects also the Tariff Board reaches con- 
clusions that are clear-cut. It establishes the fact that at 
least in some branches of woolen manufacturing, efficiency 

« That is, the system followed in almost all the tariff acts enacted 
since 1861, providing for two distinct duties on woolen goods: first, a 
" compensating " duty, specific in form, designed merely to offset the 
effects of the duty on wool in causing the manufacturer to pay higher 
prices for this raw material; and second, an ad valorem duty, which 
alone was supposed to yield protection. In the tariff acts of 1894 and 
1913 there was of course no compensating (specific) duty, since these 
acts admitted wool free. I have discussed in detail the history and 
working of the compensating system in my book on Some Aspects of the 
Tariff Question, chapter xx. 



160 Free Trade, the Tariff and Reciprocity 

is low and cost of production is high in the American mills. 
Possibly the deficiencies of the American establishments are 
exaggerated. As one reads these parts of the document, a 
suspicion arises of an endeavor to make the case strong in 
favor of the maintenance of high duties. An obvious and 
sometimes amusing consequence of the protectionist doctrine 
about cost of production is that a domestic producer is thought 
to be entitled to higher protection according as his operations 
are conducted to greatest disadvantage. If his machinery is 
not of the best, or his operatives are clumsy, or his mill badly 
located, his cost of production of course becomes high ; and on 
that ground he is entitled to ask for higher duties. There are 
repeated passages in the report dealing with the disadvan- 
tages of the American woolen manufacturer because of his 
more expensive machinery or his less efficient labor supply. 
I do not recall a passage in which attention was called to 
any advantages. Possibly there are none — not a solitary 
point of superiority; possibly the American manufacturer 
operates at higher expense in every direction. Yet, to re- 
peat, one is led to suspect that his difficulties are exaggerated, 
or that he has himself exaggerated them in his dealings with 
the Tariff Board, in order to supply arguments for the main- 
tenance of existing duties. 

Certain it is that the description is one which puts weapons 
in the hands of those who scoff at the cost-of-production prin- 
ciple. It is repeatedly stated, for example, that the working 
force in the American mills is ineffective. Operatives in 
foreign countries are said to be more intelligent, better 
trained, more steady at their work. The newly arrived immi- 
grants who throng the American mills are declared to be 
poor factory hands. The question may fairly be asked, Why, 
then, induce them to enter this occupation? Is it to the 
country's advantage that an Italian or a Greek should be 
brought over here to work for us at eight or ten dollars a 
week, when a German or a Frenchman is willing to do the 



An Inquiry on the Costs of Wool and of Woolens 161 

same work for us in his native country at five or six dollars ? 
Or to put the same sort of question in another form, Would 
all wages in the United States be higher, and would this 
really be a prosperous country, if our manufacturing estab- 
lishments and our agriculture throughout were carried on by 
ignorant and inefficient workmen, equipped with tools and 
machines no better than those of foreign countries ? 

So far as machinery is concerned, the extent to which the* 
American worsted manufacturers are dependent upon im- 
ported machinery is surprising. Continued resort to foreign 
machinery always raises a suspicion of inferiority in techni- 
cal methods. Machinery is almost sure to be installed better 
and operated better in the country where it is made. A 
country which depends upon imported appliances thereby 
confesses to not being in the van of industrial progress. Such 
is the case with the European countries when they import 
American shoemaking machinery. Such is the case with 
continental Europe when it imports English machinery for 
spinning fine cottons. Such seems to be the case in the 
worsted mills in the United States with regard to the worsted 
processes. The report states that in our worsted mills 80 
per cent of the machinery used for the processes from scour- 
ing to the finished yarn (not goods), is imported. The fig- 
ures are even more striking with some particular kinds of 
machinery. The so-called French combs (the continental 
system) are imported without a single exception; so are the 
worsted spinning machines and some of the drawing frames. 
Of the Bradford frames 90 per cent are imported. There is 
a striking difference between these figures and those for other 
kinds of machinery. Of the looms, over three-fourths are of 
domestic make, not of foreign make. It is an interesting 
feature of industrial development in the United States that 
weaving machinery has always been made chiefly by Ameri- 
can machine builders, and apparently has been worked by 
the textile manufacturers themselves to better advantage. In 



162 Free Trade, the Tariff and Reciprocity 

all the textile industries — cottons and silks even more strik- 
ingly than woolens — looms are chiefly of American make; 
and they are at least as good as foreign looms, often better. 
Practically all the carding machines used in the wool manu- 
facture are also domestic ; so are the spinning machines used 
for carded wool. To repeat, it is in the characteristic 
branches of the worsted industry as distinguished from the 
woolen industry, that the dependence upon foreign machinery 
is most striking; and most is also said of the inferiority of 
the operatives in the worsted mills. 

Precisely the same question of principle presents itself 
here as with regard to the cost of production of wool. Are 
disadvantages of the American manufacturer a reason for 
supporting him with high duties, or are they a reason for 
regretting that he has been supported by duties at all ? The 
answer cannot be given by the most labored investigation. It 
raises a fundamental question about which the legislator has 
to make up his mind by reasoning which the data of the Tariff 
Board may illustrate, but on which they can prove nothing. 
That question is the fundamental one between protection and 
free trade. But what immediately concerns the country is 
the much simpler controversy between more protection and 
less; between the present tariff (that of 1909) with all its 
extremes and a pruned and moderated system. Even pro- 
tectionists admit that duties should not be more than suffices 
to offset differences in cost; even free-traders admit that re- 
gard must be had to the vested interests of those who have 
been encouraged to embark in industries that labor under dis- 
advantages. Hence it is not inconsistent to admit the value 
of the Tariff Board's work, even though rejecting the prin- 
ciple of " scientific " revision which led to the Board's estab- 
lishment. Possibly this report might have promoted revision 
with better effect if more time had been allowed for prepara- 
tion ; perhaps also if more courage had been shown in sum- 
marizing and emphasizing the results. But none the less it 
does promote a much needed readjustment. 



IX 

HOW TARIFFS SHOULD NOT BE MADE 1 

In the course of inquiries on the legislative history of the 
Tariff Act of 1909, I encountered some episodes character- 
istic of the tariff-making methods which have long been fol- 
lowed in the United States. These episodes will be described 
in the present paper. The changes in duty which resulted 
were not of great consequence. Most of them affected arti- 
cles that are petty in comparison with the important and 
much debated articles. But the cases were typical and in- 
structive. Concrete examples show better than any general 
statement what has been our practice in the past, and what 
are the reasons for substituting a procedure more open, more 
deliberate, more closely scanned. 

During the session of 1908-09 the committees of the House 
and Senate followed different policies in preparing the tariff 
bills for the respective legislative bodies. The House com- 
mittee on Ways and Means held many hearings and printed 
every document submitted to it. The Senate committee of 
Finance held no hearings and published nothing. No doubt 
the hearings before the House committee were often unprofit- 
able, and usually were extremely wearisome to the committee 
members. They gave occasion, too, for much political fenc- 
ing. None the less, a great mass of material useful for un- 
derstanding the tariff situation was submitted, and was 
printed in the eight bulky volumes of Hearings; a set of 
documents which, it may be added, was indexed and arranged 
with unusual care. At all events the House committee pro- 
ceeded openly. Just what happened in the Senate committee 

i American Economic Review s March, 1911. 

163 



164 Free Trade, the Tariff and Reciprocity 

nobody knows. But it is an open secret that individual mem- 
bers were approached by influential persons interested in the 
tariff ; that a mass of typewritten matter was submitted ; and 
that there was expectation of considerable amendment at the 
hands of Senate leaders. The main difference between the 
procedure of the two committees — publicity in the one case, 
non-publicity in the other — should be borne in mind when 
reading what follows. 

The first episode to which I shall call attention is the 
change in the duty on structural steel. In the preceding 
tariff acts (1890, 1894, and 1897) the general trend had been 
toward a reduction of the duties on iron and steel. The 
process of reduction was continued in 1909 for most iron and 
steel products — for iron ore, pig iron, crude steel, steel 
rails. In the bill as reported by the House committee and 
as passed by the House, the duty on structural steel had been 
lowered like the rest. In 1897 it had been 5/10c. per pound ; 
the House bill proposed 3/10c. per pound. In the bill as 
reported by the Senate committee the proposed duty was 
4/10c. per pound. But there was also a change of phrase- 
ology. That change is indicated by the qualifying clause 
italicized below, which was inserted by the Senate com- 
mittee. 

" Beams, girders, joists, angles, channels, car-truck channels, T T 
columns and posts or parts of sections of columns and posts, deck 
and bulb beams, and building forms, together with all other struc- 
tural shapes of iron or steel, not assembled, or manufactured, or 
advanced beyond hammering, rolling, or casting/' 

In the act as passed the duty was finally split, being fixed at 
3/10c. per pound on structural steel valued up to 9/10c, and 
4/10c. per pound valued at over 9/10c. The important 
change, however, was not in the figures, but in the insertion 
of the italicized clause. 



How Tariffs Should Not Be Made 165 

The effect of the italicized clause does not appear upon the 
surface. No special provision was made anywhere in the 
act for structural steel that is " assembled or manufactured 
or advanced." When the change first came to my attention, 
I hunted through the measure to find what was to be the duty 
on fabricated structural steel. (Fabricated is the trade name 
for structural steel that is assembled or manufactured or ad- 
vanced. ) Apparently it would have to come under the drag- 
net clause, " manufactures of iron and steel not otherwise 
provided for." An inquiry addressed to Treasury officials 
immediately after the passage of the act brought a somewhat 
hesitating response, to the effect that it was supposed the 
fabricated steel would in fact be dutiable under that clause, 
at 45 per cent ad valorem. This was the outcome — un- 
questionably had in view when the qualifying clause was in- 
serted. The duty has not been lowered, but raised. The 
general policy followed in the act with regard to iron and steel 
manufactures had in this case been reversed. 

During the hearings before the House committee no one 
advocated an increase in the duty on structural steel. The 
steel manufacturers in their general arguments before the 
committee expressed themselves, though not with great in- 
sistence, against reductions of duty ; but they proposed no ad- 
vance. Only one statement, to be noted presently, was made 
with specific reference to structural steel, and that was in 
favor of a reduction. There is not the slightest indication 
of what happened in the Senate committee, or what reasons 
were advanced in favor of the substantial increase in duty 
which was there provided for. 2 

Having satisfied myself by inquiry sent to the Treasury 
officials that the duty had in fact gone up, I endeavored to 
ascertain what the change meant. But letters addressed to 

2 The Senate committee's amendment was accepted in the Senate 
itself without explanation or debate. Congressional Record^ April 22, 
1909, p. 1468. 



166 Free Trade, the Tariff and Reciprocity 

various persons in the trade brought vague and sometimes 
contradictory answers. 3 One of them, engaged in the manu- 
facture of fabricated structural steel, stated that the impor- 
tation of fabricated shapes was unlikely under any circum- 
stances, except possibly from Canada. The European mak- 
ers, he said, were not used to our engineering designs, and 
would not be likely to undertake orders for the United States. 
But another, also engaged in the manufacture, said that in 
times past there had been a considerable importation of fabri- 
cated steel, and that fabricated shapes alone were likely to be 
imported. The customs statistics showed that in some pre- 
vious years there had been considerable importations ; and, if 
the second statement was accurate, the shapes imported were 
in the fabricated class. Still another informant, a building 
contractor, informed me that fabricated shapes could be made 
anywhere to design and could be carried to any desired spot, 
whether New York, Texas, South Africa, or India; they 
could be put together without difficulty by the engineers on 
the spot. And still another stated that, although there was 
not in ordinary times much likelihood of importation of either 
fabricated or unfabricated shapes on our eastern seaboard, 
yet there was such a possibility at occasional times of unusu- 
ally heavy demand; and that even under normal conditions 
cheap ocean rates made possible an importation from Europe 
to such places as Galveston and Puget Sound. And finally 
one of my acquaintances, much experienced in this sort of 
business, stated his impression that the rearranged duty was 
in some way connected with a " deal " between the United 
States Steel Corporation and the German Stahlwerksverband, 
by which a division of the market had been arranged. It is 

3 I am not at liberty to give the names of my correspondents. The 
same is the case with regard to most of those with whom I communi- 
cated regarding the other changes of duty mentioned elsewhere in the 
present article. But I am able to vouch for the good faith of the per- 
sons who have given information, and am confident that their state- 
ments of facts are accurate. 



Horn Tariffs Should Not Be Made 167 

conceivable that the higher duty might clinch such a compact, 
by preventing the foreigners once for all from trespassing on 
the Steel Corporation's domestic preserve. It is conceivable 
also that here is an explanation of the failure of importers to 
protest against the advance. The change, being proposed in 
the Senate bill, which was printed and widely distributed, 
could not fail to have come to the notice of persons interested ; 
yet no opposition seems to have been made. I was referred 
by a trade journal to a New York dealer who was said to be 
a representative of the German steel exporters and so to be 
in a position to throw light on the situation. But an inquiry 
addressed to this person brought a courteous answer in very 
vague terms, telling only of things easily ascertained by any 
one conversant with the Custom House statistics, and giving 
no significant information whatever. 

This was the end of my inquiries. Nothing definite was 
brought to light concerning the origin and the effect of this 
increase of duty. I suspect that, though in ordinary times 
there is no likelihood of an importation of fabricated steel, 
there is a chance of importation during rush times and at 
outlying districts ; that the competition is not welcome to the 
domestic makers and particularly the Steel Corporation ; and 
that the change in duty was quietly arranged in order to pre- 
vent this sporadic competition. A compact between the Steel 
Corporation and its foreign potential competitor is entirely 
within the bounds of possibility. It may be that a little light 
is shed on the situation by the single statement made on this 
subject before the House committee and referred to a mo- 
ment ago. A domestic purchaser of structural steel thus pre- 
sented the case to the House committee : 4 

"It is a well-known fact to all in the manufacturing of finished 
lines of the iron and steel business that outside of the United 
States Steel Corporation, and perhaps three or four others, there 
are no makers of the class of materials we use, excepting the item 

* Hearings before the Committee on Ways and Means, II., 1526. 



168 Free Trade, the Tariff and Reciprocity 

of plates. With but few exceptions all of the makers of this class 
of raw material do fabricating, i. e., putting it together in the 
shape of bridges, girders, columns, and what is designated gen- 
erally as fabricated work, although perhaps their aggregate tonnage 
in the fabricating line itself would not amount to more than one- 
third of the total fabricating output of the country. At present, 
however, with the high prices they are enabled to maintain on the 
material before it is fabricated, these makers are given undue ad- 
vantage over those fabricators who are not makers of the material, 
but to whom they sell, and can make much lower prices on fabri- 
cated work, and are doing so to-day and virtually controlling the 
price on this class of work, the reason being that the tariff, now 
so excessive, enables them to make a good profit on the material as 
first rolled into the shapes mentioned above, so that they can afford, 
if necessary, virtually to throw in the fabricating for little or 
nothing." 

The next case was of an article much less important, but 
again a characteristic case. A change was made in the duty 
on cotton gloves. Under the Dingley Act (of 1897) these 
had come in at a duty of 45 per cent — the dragnet clause 
on manufactures of cotton n. o. p. 5 The House bill had left 
the duty unchanged. The bill as reported by the Senate 
committee to the Senate still left the duty unchanged. But 
in the course of action by the Senate Committee of the Whole, 
a new clause was inserted; the cheaper cotton gloves were 
to be dutiable not at the simple ad valorem rate, but at a 
compound rate, partly specific and partly ad valorem. In 
the act as passed, the Senate provision was substantially main- 
tained. Gloves having a value of $6.00 or less a dozen pairs, 
were made to pay a duty of fifty cents per dozen plus 40 per 
cent ad valorem. If valued at over $6.00 a dozen, the duty 
remained ad valorem without any supplement of specific duty, 
but the rate went up to 50 per cent. 

It is obvious that a change made through action by the 
Senate itself attracts less attention than one made by its 
Committee on Finance. The bill as prepared by the Com- 

5 " Not otherwise provided for." 



How Tariffs Should Not Be Made 169 

mittee is printed, and is sent to every senator and indeed to 
every one interested. Changes there proposed readily at- 
tract the attention of the persons concerned. But changes 
made by the Senate itself are carried out in the wearisome 
routine of the amendments, with little attention and usually 
with no debate. Once embodied in the bill as passed by the 
Senate, they can be changed only in Conference Committee 
— always a difficult task. 

On the surface there is nothing to show what will be the 
effect of a change of this sort. It may or may not be of 
substantial importance, the effect depending on the character 
and value of the goods used. On cheap gloves, the insertion 
of the additional specific duty would bring a great advance. 
Thus on gloves valued at one dollar a dozen the old rate was 
45 per cent, that is, forty-five cents; the new rate was fifty 
cents plus 40 per cent, or ninety cents in all. The duty was 
doubled, and became 90 per cent on the value. On dearer 
gloves, the specific duty would be proportionally less weighty. 

In fact, it was the cheaper grade of gloves which proved 
to be affected. Inquiry among persons conversant with the 
trade showed that the cheaper gloves worth at wholesale one 
dollar a dozen or thereabouts, were imported largely from 
Germany, and used for the most part by policemen, marines, 
and militia, for dress occasions ; bought principally by public 
officials. The duty was inserted in the Senate through the 
activity of a person well known in the trade. He had got 
the ear of a New England senator, a member of the Finance 
Committee, who had secured for his protege the increase of 
duty. An importer wrote me as follows: 

" For years we have bought men's and boys' cheap cotton gloves 
wholesale from $1.12% to $1.25, from Germany, but on account of 
the extra special duty of 50c. per dozen, it has been absolutely im- 
possible to continue buying these goods abroad. . . . We have been 

obliged to place our orders with Mr. -. He is a member of the 

firm of , who are making a very cheap domestic glove and 



170 Free Trade, the Tariff and Reciprocity 

reaping the direct benefits of the tariff which Mr. was in- 
strumental in placing on these goods. He was in our store last 
Saturday, soliciting more business and states that he has received 
some very large contracts from the II. S. Army. One of his orders 
for this spring was for over 200,000 pairs. So that not only the 
public but the TJ. S. government is contributing to his support 
through the new tariff." 

One of the details deserves notice. In the bill as passed 
by the Senate and as sent to the Conference Committee, the 
new rates had been made applicable to " cotton gloves " in 
general. But private protests to the Senator in charge did 
secure a modification. The language was amended, in con- 
ference, by the insertion of the words "men's and boys'." 
Hence gloves for women in the end came in at the old rate 
of 45 per cent. The Senator was able to allow this concession 
since it did not affect the plans of his protege. 

Now there may be good grounds of public policy for mak- 
ing sure that men's white cotton gloves are made at home and 
not imported. It may be thought humiliating for this great 
country that our soldiers should wear on dress occasions cheap 
cotton gloves made by cheap German labor; it may even be 
thought that their martial spirit would be enfeebled. For 
myself, I am able to face the possibility without a shock to 
my feelings of patriotism. But it seems tolerably clear that 
the moving force in bringing about the new duty was not the 
semi-military consideration, but pressure from the interested 

Mr. . If changes in duty such as this are to be made, 

should they not be deliberately reported and publicly con- 
sidered ? 6 

The third case is that of nippers and pliers. These also 
had formerly been subject to a dragnet duty, as manufac- 
tures of iron and steel, at 45 per cent. The bill, as it came 

« The amendment for the increase of this duty was offered at an even- 
ing session, as coming from the Finance Committee, and was accepted 
after a very few words of debate, Congressional Record } June 7, 1909, 
pp. 2914-2915. 



How Tariffs Should Not Be Made 171 

from the House Committee on Ways and Means and as passed 
by the House, made no change. As submitted to the Senate 
by the Senate Finance Committee, it still proposed no change. 
But in the course of action by the Senate itself a consider- 
able rearrangement was made. Again there was substituted 
a compound duty, partly specific and partly ad valorem. 
Nippers and pliers were to be subject to a duty of ten cents 
per pound plus 40 per cent. In the act as passed the Senate 
amendment was virtually incorporated : the duty became eight 
cents per pound plus 40 per cent. 

Once more I made inquiries of persons in the trade, and 
was informed that the duty was put in at the request of a 
Utica manufacturing concern. That concern had presented 
a statement to the House committee, which was duly printed 
in the Hearings; 7 but its request for an increase of duty was 
not granted in the House bill. In the Senate a well-known 
official, not a senator, but high in the administrative hier- 
archy, stood sponsor for the change. The persons who pro- 
tested at the last minute against the increase of duty were 
informed that it really was of little consequence what they 
might say or present. So long as this statesman was insist- 
ent in urging the increased duty, it would remain. And re- 
main it did. I was shown copies of some typewritten state- 
ments presented by the Utica concern to the Senate Finance 
Committee. They were obviously of the sort that are pre- 
pared pro forma; a medley of crude figures about cost of 
production, exaggerated statements about the dreadful low 
wages in Germany, and the like, which would not stand a 
moment's searching analysis ; such stuff as is familiar in state- 
ments made before tariff committees. All this obviously was, 
to repeat, pro forma. The moving impulse towards the 
higher duty was the influence of the friendly statesman, and 
figures and arguments for the duty had as little real influence 
as figures and arguments against. 

t Hearings, III, 2782> 



172 Free Trade, the Tariff and Reciprocity 

Now, as to the effect. Like all compound duties (partly 
specific and partly ad valorem), it bore most heavily on the 
cheaper classes of goods. On small nippers and pliers, light 
in weight, the specific duty of eight cents per pound was in- 
significant ; these continued to be imported. The larger sizes, 
used for wire fencing and the like, were subject to a much 
higher duty, and the importation of these declined. The 
domestic manufacturers took a larger proportion of the busi- 
ness. My chief informant stated, however, that the TJtica 
concern, originally the party mainly interested, soon found 
competition from other manufacturers, and that the business 
was distributed among various domestic producers. 8 He 
wrote also : 

" The Utica concern is very progressive and aggressive and I be- 
lieve that even if no change had been made in the schedule they 
would nevertheless have continued to get more and more of the 
trade in pliers and nippers, thereby reducing the sale of imported 
goods. . . . The increase in the duty has of course helped them 
very materially, but my opinion is that in the long run they would 
have accomplished the same purpose, although possibly with less 
profit." 

Somewhat different was another case, that of razors. Here 
there was public presentation of petitions to the House com- 
mittee; and some advances of duty were proposed in the 
House bill. In the Senate a still further increase of duty 
was proposed, and the Senate rates in the main were enacted. 
The course of events is indicated in the following tabulated 
statement, which also indicates how complex was the system 
of rates. As in many other of the schedules that reached 
very high rates, there was a double complication. Goods 
were classed according to value, the duty shifting abruptly 

s In the statement submitted by the Utica Company to the House 
Committee, it is said {Bearings, 2782) : " We are the only plant in the 
country making no other product except nippers and pliers." A list is 
given of other firms " who make pliers as a side line." 



How Tariffs Should Not Be Made 



173 



as a given point of value (say $1.50 a dozen for razors) was 
reached. Further, the duty was compound — so much per 
dozen and in addition an ad valorem rate. It will be ob- 



DUTIES ON RAZORS 1897-1909 



Act of 1897 



Value up to $1.50 

doz. 

duty 50c. dozen 

plus 15%. 



Value $1.50 @$3.00 

duty $1.00 dozen 

plus 15%. 



Value over $3.00 
duty $1.75 dozen 
plus 20%. 



Duties proposed in 1909 



House bill 



Value up to $1.50 

doz. 

duty 50c. dozen 

plus 30%. 



falue $1.50 @$3.00 

duty $1.00 dozen 

plus 30%. 



Value over $3.00 
duty $1.75 dozen 
plus 30%. 



Senate bill 

Value under $1.00 

doz. 

duty 45%. 



Value $1.00 
doz. 
duty 6c. each 
plus 40%. 



$1.50 



Value $1.00 @ $1.50 

doz. 

duty 5c. each 

plus 35%. 



Value $1.50 @ $2.00 

doz. 

duty 10c. each 

plus 40%. 



Value over $2.00 
duty 12c. each 
plus 50%. 



Act of 1909 



Value under 
doz. 
duty 35%. 



$1.00 



Value $1.50 @ $2.00 

doz. 

duty 10c. each 

plus 35%. 



Value $2.00 @ $3.00 

doz. 

duty 12c. each 

plus 35%. 



$3.00 



Value over 
doz. 

duty 15c. each 
plus 35%. 



served that the Senate changed the House figures in such 
manner as to disguise somewhat the increase of duty. The 
specific rate on the cheapest razors had been in the House 
bill 50c. a dozen. The Senate made it 6c. each, or 72c. a 
dozen. On the medium grade razors the House specific 
rate had been $1.00 a dozen; the Senate made it 10c. each, 
or $1.20 a dozen. On the highest class of razors the House 
specific rate had been $1.75 a dozen; the act finally made it 
15c. each, or $1.80 a dozen. In the act as passed the Senate 
rates were in the main retained, but with the ad valorem duty 
fixed in all cases at 35 per cent. The reader will see for him- 
self how the specific duties were rearranged in the various 
stages of the bill. The net outcome was a very substantial 
increase. 

In this case there was not a little discussion. As already 



174 Free Trade, the Tariff and Reciprocity 

mentioned, the request for a higher duty was presented to the 
House committee and duly recorded. 9 In the Senate there 
was an active debate. It was to be expected, and gives no 
occasion for special criticism, that those who advocated an 
increase should put the case on the unqualified protectionist 
grounds. But there were some curious misstatements and 
misconceptions. The reader who searches in the columns of 
the Congressional Record for items regarding the economic 
development of the United States will find here accounts of 
astounding industrial reverses. 10 It would appear that a 
decade ago there were sixty or seventy razor factories in the 
United States, and that this flourishing industry had been 
virtually wiped out by foreign competition; the number of 
factories had been reduced to five ! But I learn from pri- 
vate sources that the cataclysm was not really so violent. 
Some of the domestic manufacturers, in conversation with a 
senator active in the debate on this subject had informed him 
that a decade ago there were " six or seven " razor factories 
in the United States, and that the number had fallen to five ! 
The distinguished senator had understood them to say " sixty- 
seven," and had so stated on the floor of the Senate. 11 Hav- 
ing made the statement in public, he did not wish to modify 
it in so sweeping a way as would have been necessary to re- 
duce sixty-seven to six or seven. Accordingly the statement 
remained, was repeated by other senators, and is permanently 
recorded in the files of the Congressional Record. It may 
happen that in coming centuries some research student of 
economic history will turn to these pages as " original " 
sources of information and will find here unmistakable con- 
temporary testimony of the extraordinary mutations of in- 
dustry in the United States at the beginning of the twentieth 
century. 

» Hearings, 2161. 

io The debate is recorded in the Congressional Record, Senate Pro- 
ceedings, May 15, 17, 18, 1909. 

ii Congressional Record, 2165, 2180, 2221. 



How Tariffs Should Not Be Made 175 

In its strictly economic aspect, the razor situation is in 
many respects curious. Some sorts of razors we export- — 
the world-known safeties. It is obvious that, in order to ex- 
port, we must be able to produce them more cheaply than can 
foreigners. Other sorts of razors, especially the finer grades 
of " old-style " razors, we import in the face of high duties. 
Evidently the old-style razors are produced more cheaply in 
foreign countries. Most of them had come from England 
in earlier days; but of late England has been displaced by 
Germany. It was the dreadful Germans and their deadly 
cheap wages that were chiefly referred to in the Senate de- 
bates. 

These cross-currents in the importations and exportations 
of razors are in line with similar cross-currents as to other 
sorts of hardware. In general, we export rather than import 
finished iron and steel goods. We export builders' hardware 
(hinges, locks, door knobs), machinery and machine tools, 
locomotives, agricultural implements, and the like. On the 
other hand, we import many pocket-knives (though in recent 
years more and more pocket-knives, especially of medium 
grades, have been manufactured in this country), and a mis- 
cellaneous assortment of anchors, chains, tools, machines. 
The explanation of these apparently anomalous juxtaposi- 
tions of imports and exports, is that things made by machin- 
ery are likely to be made in this country and even to be ex- 
ported, whereas those made by artisan hand labor are likely 
to be imported. When it comes to turning out by machinery, 
on a large scale, great quantities of goods of a standard pat- 
tern, we need not fear foreign rivals. For this sort of thing, 
we have, in the language of the economists, a comparative ad- 
vantage. Notwithstanding higher wages, we can turn out the 
product as cheaply as the European rival, even more cheaply. 
But when it comes to articles made by hand labor, the Euro- 
pean who gets his labor at a cheaper rate can undersell us. 
This sort of reasoning had seemed applicable in explanation 



176 Free Trade, the Tariff and Reciprocity 

of the continued importation of old-style razors. I still be- 
lieve that in general the explanation is a good one. It ac- 
counts in the main for these peculiarities in our international 
trade ; it explains why some articles are imported, and others, 
apparently like them, are not imported, and even are ex- 
ported. But on inquiry of persons engaged both in the im- 
portation and in the manufacture of razors, I find that the 
facts do not fit into the reasoning, so far as this particular 
article is concerned. It appears that in former times ra- 
zors came chiefly from England. There they were made by 
skilled artisans, and in the main by hand labor. The Shef- 
field grinder put the edge on each individual blade by hand, 
on varying sizes of small stones. But of late razors have 
come more and more from Germany, and my informant 
writes as follows: 

In this particular industry the Germans have decidedly taken a 
leaf out of our book. While we have been struggling along, trying 
to make razors under the old English methods (with a few — but 
very few — modern appliances), they have gone ahead and com- 
paratively revolutionized the methods; introduced new ways for 
forging the blades, and above all things, invented and put into 
satisfactory operation grinding machines which have enabled them 
not only to manufacture razors at a very low cost of production, 
but to produce a quality and uniformity of goods with which we 
simply cannot compete. 

It would seem that the Americans for once have been back- 
ward. Apparently what the domestic producers of razors 
really need is not higher duties but greater enterprise and 
skill. A demand for extreme duties is always suspicious. 
In this case, as in so many others on our present tariff list, 
the combination of specific and ad valorem rates conceals, 
and at the same time achieves, duties of from 75 to 100 per 
cent. Where the domestic producers ask for so great a 
handicap on their foreign competitors, the presumption is 



How Tariffs Should Not Be Made 177 

against them. Either they are trying to do work for which 
our resources and our ways are not fitted, or else (as seems 
here to be the case) they are not abreast of progress in their 
own industry. 

Eeturning now to such cases as were first considered — 
structural steel, cotton gloves, nippers and pliers — we have 
two questions to consider. The first relates to the expe- 
diency of the advances in duty; the second to the methods 
by which the advances were brought about. 

On the first question, the answer must turn chiefly on 
one's opinions regarding the advantages or disadvantages of 
protective duties. The convinced protectionist will believe 
that the domestic production of these several articles is de- 
sirable in itself. Whatever duties are necessary in order to 
" acquire " a new industry are justified. 

And on the question of legislative methods also, one's atti- 
tude toward the fundamental question affects the answer. 
The protectionist will be likely to say: this is simply the 
way of the world, or at least the way of the United States. 
Our legislative methods are in every direction unsystematic 
and irresponsible. Tariff bills are inevitably dealt with as 
are river and harbor bills and general appropriation bills. 
The only way in which a desired result can be brought about 
has been through the influence of individual legislators and 
in the traditional ways. We cannot escape log rolling, pri- 
vate interviews with influential politicians, settlement of de- 
tails in quiet committee meetings. 

The opponent of protection, on the other hand, will smell 
corruption. Probably he is mistaken in this score. The 
legislators have a pecuniary stake in the rarest of cases. 
The only sort of " corruption " that plays any considerable 
part is that of contributions to party chests ; and the persons 
who make such contributions, as well as those who receive 



178 Free Trade, the Tariff and Reciprocity 

them, may maintain in good faith that the funds are used in 
the promotion of a policy believed to be sound not only by 
themselves but by the majority of the voters. 

None the less, and quite apart from any charges of cor- 
ruption, there seems now to be a conviction that our legis- 
lative methods should be changed so far as the tariff is con- 
cerned. Whatever may have been the methods inevitable 
in the past, a more open and deliberate procedure should be 
followed in the future. It may be a question how far the 
reaction against protectionism which seemed to show itself 
in the elections which were held after the passage of the 
tariff act of 1909, stands for a permanent change in the 
public's attitude. Very possibly it is only a blind revolt, 
holding the party in power responsible for high prices, de- 
pression in business, and all other things unwelcome. But 
there is a general belief that the country should know more 
about the details of tariff legislation, and should know about 
them in advance. If increases of duty are to be made, let 
them be made openly, and let the reasons be stated. If a 
domestic producer is to be helped by a handicap on foreign 
competitors, let it be made clear from the start just what 
is to be done for him and just what a given tariff provision 
means. Let there be no more jokers. 

Further, there is a strong conviction that inquiry should 
be made and publicity should be secured through some 
agency other than the House and Senate committees. These 
have an extraordinary multiplicity of details to consider. 
They are so wearied by prolonged and repeated hearings, 
crowded into a few weeks, that it is impossible for them to 
give serious attention to all the matters presented. It is 
not to be wondered at that the Senate committee refused to 
have public sessions. The House committee, which had much 
more time for preparation, was almost swamped by its hear- 
ings. The Senate committee, which of necessity had less 
time, naturally felt that it would be swamped once for all. 



How Tariffs Should Not Be Made 179 

But this situation, perhaps making star chamber procedure 
inevitable, gives opportunity for covert changes, for concealed 
pressure from private interests, for irresponsible legislation. 
Hence the demand for some permanent body, equipped to 
make investigation, and to make a judicial report on the sig- 
nificance of proposed changes. Such cases as have been con- 
sidered in the preceding pages show how tariffs should not 
be made. 



X 

THE PROPOSAL FOE A TARIFF COMMISSION x 

The proposal for the establishment of a permanent tariff 
board or commission is regarded in many quarters as show- 
ing the way to a solution of the tariff question. There is 
much to be said for it. But there are serious difficulties and 
limitations, and above all troublesome questions about the 
character and make-up of the proposed board, and the course 
of action to be followed in improving our general political 
organization. 

The first thing that needs to be borne in mind is that no 
tariff commission can settle policies. No administrative 
body of any kind can decide for the country whether it is to 
adopt protection or free trade, to apply more of protection 
or less, to enact a system of purely fiscal duties or " a tariff 
for revenue with incidental protection." Such questions of 
principle must be settled by Congress — that is, by the voters. 

It is further to be borne in mind that the advocacy of a 
" scientific " settlement of the tariff does not carry us far. 
There are no scientific laws applicable to economic problems 
in the same way as the laws of physics are applicable to engi- 

i North American Review, February, 1916. — This article is reprinted 
with no change of substance, and must be read with regard to the time 
of publication. Later in the year 1916 (October), Congress passed the 
act establishing the United States Tariff Commission. In the deter- 
mination of its functions, the second of the plans described in the text 
was followed: the Commission was made an independent board, with 
powers of investigation only and with no administrative functions. My 
experience on the Commission has not led me to modify the opinions 
expressed in this article. Useful though the independent investigating 
Commission is for research and report, there is occasion for reorganiza- 
tion and consolidation of the various boards and sub-departments now 
concerned with customs matters. 

180 



The Proposal for a Tariff Commission 181 

neering problems. If we extend the term " science " to eco- 
nomics, we must remember that it can refer in this subject 
only to certain generalizations and to a body of useful in- 
formation, not to a system of clear-cut principles or laws. 
Some of the economic generalizations are well established; 
others are of a very tentative and provisional sort. I believe 
some things are established concerning the working of pro- 
tective duties; but there is no such a consensus of opinion 
on the subject as to give us a body of principles applicable at 
once in legislation, or such as to enable us to decide at once on 
a method of procedure. [For example, it is often maintained, 
not only in the United States, but in other countries as well, 
that the " scientific " solution of the tariff question is that of 
the equalization of competition or the equalization of costs 
of production. The underlying idea is that such duties shall 
be imposed as will equalize the difference between cost of 
production within a country and a lower cost of production in 
foreign countries. Now, I do not myself believe that this 
is a scientific or a commendable basis for the levying of pro- 
tective duties. Consistently carried out, it amounts to say- 
ing that all industries are equally worth having; that when 
differences in cost are great, duties should be correspondingly 
high ; that every industry, no matter how ill adapted to a 
country's natural resources or its industrial qualities, should 
have the equalizing protection ; that we should never stop to 
consider what are the directions in which we can apply a 
country's labor and capital to best advantage. The equaliz- 
ing proposal is perhaps a convenient and workable way of 
dealing with a protective system which is established and to 
which important industries have adjusted themselves. Quite 
conceivably Congress might adopt such a principle, and re- 
quest a tariff commission to frame a bill based upon it. But 
it cannot, in my judgment, be said to rest upon any estab- 
lished economic principle, or to be scientific in any accurate 
sense of the term. 



182 Free Trade, the Tariff and Reciprocity 






One other preliminary remark may be made. Much is 
said at the present juncture about the importance of a tariff 
commission in order to put the country in a state of indus- 
trial " preparedness." The war, it is said, must necessarily 
come to a close before very long, and then new conditions of 
international competition will have to be faced. Should we 
not have a careful and elaborate inquiry as to the best way 
of facing the coming situation ? On this matter also I doubt 
whether a tariff commission can help us much. No one, not 
the ablest set of men, even though provided with any amount 
of money for engaging " experts/' can possibly learn what 
sort of industrial conditions will have to be faced when the 
war comes to an end. We could not go to European countries 
for the purpose of investigation, or send agents to European 
countries, for the obvious reason that the respective govern- 
ments would not allow us to peer into their affairs. Even if 
we could send agents and get all possible information con- 
cerning existing conditions, no prediction could be made con- 
cerning the course of development after peace. And if all 
these difficulties could be overcome, there would remain yet 
a further difficulty in the way of getting " prepared." The 
elaboration of a tariff bill at the hands of a commission is 
necessarily a slow process. The experience of the defunct 
Tariff Board of 1910-12 indicates what must necessar- 
ily happen. That Commission was composed of able men, 
and it had large resources. It conducted excellent investi- 
gations and made valuable contributions to the understand- 
ing of some phases of the tariff. But it needed a couple of 
years to carry on its investigations, and even then was com- 
pelled to send in reports before the investigations were com- 
pleted, because of political pressure to induce it to make 
some sort of early showing. If a tariff commission had the 
task of preparing a complete bill on all the complicated 
schedules, involving the vast range of our industries, it would 



The Proposal for a Tariff Commission 183 

be quite unable to report or recommend anything until a 
considerable period had elapsed. No; the commission pro- 
ject must be judged, not with reference to any immediate 
emergency, real or supposed, but with reference to its value 
as a permanent policy. 

Incidentally, I venture to express my opinion that there 
is exaggeration in the talk about necessity of preparedness 
for the coming conditions of peace. No doubt there will be 
a jar, a shock, when the war comes to a close. But it is 
not likely to be at all so great as that which came at the 
outbreak of the war. Then there was a crash from a clear 
sky. Now, everybody knows that the change is certain to 
come, and everybody is more or less on the lookout for it. 
It is in the highest degree improbable that the end of the war 
will cause an industrial crisis in any country at all compar- 
able to that of the midsummer of 1914 ; and least of all in the 
United States. No doubt, there will be a period of readjust- 
ment, of uncertainty, very possibly of depression; then a 
gradual settling down to the new conditions. And as this 
gradual settlement takes place, it is by no means clear that 
any far-reaching change in international trade will be ex- 
perienced. Certainly, so far as imports of manufactured 
articles into the United States are concerned, there is no 
probability that they will be greatly swelled. European in- 
dustry is much more likely to be weakened than to be 
strengthened by the fearful strain of the war, and for some 
years in the future is less likely to be a formidable compet- 
itor than before. Undoubtedly, there will be varying con- 
ditions in different industries ; but I see no indications of a 
portentous outpouring of exports. Whether the great strug- 
gle will eventually have far-reaching consequences upon the 
commercial relations between nations, it would be hazardous 
now to predict. But any long drawn out and slowly de- 
veloping consequences of this kind can have no bearing upon 



184 Free Trade, the Tariff and Reciprocity 

the immediate tariff problem confronting the United States. 
To repeat, the tariff commission project should be considered 
without regard to the war contingencies. 

Nevertheless, there is much to be said in favor of a per- 
manent tariff commission or organization of some sort. Even 
though it could not solve the tariff question on a " scientific " 
basis, or take the tariff out of politics, or evolve a scientific 
tariff, or put the country in a state of preparedness, it could 
render important services. 

The main thing on which a body of this kind could be 
helpful is in the more careful preparation of tariff legisla- 
tion. It could aid in the accurate, honest, and consistent 
carrying out of whatever policy Congress — that is, the party 
to which the voters had given control of legislation — might 
wish to carry out. 

Every one knows that the traditional ways of framing tar- 
iff legislation have been in the highest degree haphazard. 
There has been rough and ready settlement by the Congres- 
sional committees, influenced in a general way by the Ad- 
ministration in office. The House Ways and Means Com- 
mittee has framed its bill; the House of Representatives it- 
self has then amended its committee bill. The Senate Fi- 
nance Committee has made more or less hash of the House 
bill, and the Senate itself has made more or less hash of its 
own committee bill. Then the Conference Committee of the 
two Houses gets together. That Conference Committee, al- 
ways under pressure because of short time, holding its ses- 
sions in secret, dominated by a few individuals, influenced 
more or less by advice or pressure from the White House, has 
evolved the final tariff bill. And, if there was to be any tar- 
iff legislation whatever, this Conference Committee bill had 
to be passed once for all in the shape in which it came from 
the committee. 

All of the bodies concerned — the House Committee of 
Ways and Means, the Senate Finance Committee, the Con- 



The Proposal for a Tariff Commission 185 

ference Committee, the President and the Secretary of the 
Treasury and the officials of the Treasury Department — 
have had a flood of statements and representations and sta- 
tistics poured in on them. They have been veritably 
swamped by the mass of interested testimony. The legis- 
lative committees have had clerks or experts, selected hur- 
riedly and put to work hurriedly — often selected because 
some one had a pull and wanted to get a job. Even the most 
conscientious chairmen and members of the committee could 
not possibly make themselves informed about the meaning 
of all the figures and classifications and specific duties and 
ad valorem duties. Influential persons could " fix " legisla- 
tion and work " jokers" in, and eventually bring into ef- 
fect provisions which could not be said to be intended by 
Congress or by any one except an occasional conniving mem- 
ber of Congress. Our tariffs have been settled in ignorant 
and irresponsible fashion. Of this we have become pain- 
fully aware, and it is natural that we should look for some 
sort of a remedy. 

A permanent tariff commission, it may well be argued, 
could be, and would be, of much service. It could ascertain 
just what a given duty meant, just what sort of arrangement 
and classification was expedient, whether a particular phrase- 
ology entailed consequences not at all obvious on the surface. 
If composed of really able and experienced men, its recom- 
mendations would have weight. No one supposes that Con- 
gress would adopt them as a matter of course. They must 
always be in line with the general system of industrial policy, 
— toward protection or toward free trade, toward raising 
duties or reducing them — which the political conditions de- 
termined. They would necessarily be subject to change by 
Congress. But they would probably have a strong backing 
from public opinion; they would enable high-minded and 
conscientious members of Congress (and these constitute the 
majority) to ascertain the exact situation and to support care- 



186 Free Trade, the Tariff and Reciprocity 

ful legislation. A commission might greatly improve the 
situation. 

There is another aspect of the proposal to which little 
attention has been given in current discussion, and which is 
of the first importance. What hind of a commission shall 
we try to set up ? Shall it be an entirely independent body, 
like the Interstate Commerce Commission or the Federal 
Trade Commission, quite separate from the ordinary admin- 
istrative agencies of the Government ? Shall it be concerned 
primarily with industrial investigations, and shall it give 
advice chiefly on questions of industrial policy ? A commis- 
sion quite independent, and giving attention chiefly to mat- 
ters of policy, is most commonly advocated. And yet there 
are serious difficulties in the way of such a plan. 

In the first place, the very existence of a permanent tariff 
commission whose main purpose would be to recommend 
tariff legislation to Congress, would be a constant incentive 
to change. The only excuse for the continued maintenance 
of such a commission would be that the tariff needed con- 
tinual readjustment. The commission itself would feel 
bound to justify its usefulness by unremitting investigation, 
and it would necessarily have to make repeated recommenda- 
tions to Congress. But one of the things borne in on every 
thoughtful observer of tariff changes, whether an economist 
by profession or an experienced man of affairs, is that inces- 
sant changes in tariff legislation are bad. Better a low tar- 
iff once for all or a high tariff once for all, than constant 
shifting or incessant suggestion of shifts. The industries 
of a country can adapt themselves to almost any tariff sys- 
tem if only that system be settled and maintained. More- 
over, one among the few general principles or " scientific " 
statements which the economist can authoritatively lay down 
is that such benefits as accrue from a system of free trade 
are secured only if that system is maintained for a long 
time; and, on the other hand, that such gains as are obtain- 



The Proposal for a Tariff Commission 187 

able from protective duties (by protection to young indus- 
tries, for example) are secured only if the protective duties 
are maintained for a long time. A permanent tariff commis- 
sion whose function it was to make repeated reports and rec- 
ommendations would tend to constant modification, constant 
change, constant unsettlement. 

Hence if we are to have a commission whose duty it shall 
be to shape the tariff or solve questions of policy, I am in- 
clined to think well of some such plan as that of the Tariff 
Board of 1910-12. Let its duty be to make inquiries, 
to secure a body of accurate information, to make recom- 
mendations for a given situation. Let it be avowedly for an 
immediate purpose: to serve Congress and the committees 
in framing a particular piece of legislation. Such was the 
case also with the Tariff Commission of 1882. The recom- 
mendations of that Commission, it is true, were by no means 
followed in their details when Congress passed the Tariff 
Act of 1883. Nevertheless, the tariff of 1883 was a better 
piece of legislation because of the recommendations of the 
Commission than it would have been without them. It is not 
too much to expect that even greater weight would be given 
to the recommendations of a similar commission in the fu- 
ture, and that it would serve even more to make a tariff 
act careful, well-balanced, consistent. 

It is conceivable, however, that we should have a commis- 
sion whose duties should be not solely those of report and 
recommendation on general policy, but which should have to 
do largely with the settlement of current administrative 
questions. This is precisely the situation with the Inter- 
state Commerce Commission and the Federal Trade Commis- 
sion. They have stated duties in connection with the ad- 
ministration of legislation. These, indeed, are their chief 
duties. The Interstate Commerce Commission is a sort of 
court. Its chief business is to decide specific matters at issue 
between the shippers and the railways. The new Federal 



188 Free Trade, the Tariff and Reciprocity 

Trade Commission is given jurisdiction of a similar kind. 
Both have, in addition, the power and duty to make investi- 
gation and report. But it is not incumbent upon them to 
be mainly or continuously on the lookout for changes in 
legislation. They are chiefly concerned with the administra- 
tion and improvement of the existing situation, and they 
recommend legislation so far as their experience enforces 
upon them the desirability of changes consistent with the 
general spirit and policy of the legislation already in force. 

Now there are administrative questions in connection with 
the tariff which are constantly calling for solution, and which 
at the same time bring to light the need of changes in legis- 
lation. There are vexing questions of classification under the 
tariff — whether a particular piece of machinery should be 
classed as a manufacture of wood or a manufacture of iron, 
whether the chief component material of a fabric is wool or 
silk. There are questions on the methods of appraisal of 
duties. Inquiries must be made in foreign countries relating 
to the values upon which ad valorem duties shall be assessed. 
Strictly legal questions of interpretation arise, which now 
go to the Court of Customs Appeals, Statistics must be com- 
piled and intelligently presented. 

For all these matters we now have dispersed and compli- 
cated arrangements. We have the Board of General Ap- 
praisers, which is a sort of court for deciding on the ap- 
praisement of merchandise. The Assistant Secretary of the 
Treasury in charge of customs instructs collectors on the 
classification of customs; and the Customs Divisions of the 
Treasury Department have similar duties for the routine 
cases. There are special agents of the Treasury who go 
abroad and make investigations and reports. Consuls and 
consular agents abroad make similar investigations. The 
Bureau of Domestic and Foreign Commerce in the Depart- 
ment of Commerce has a staff of commercial agents who 
make reports concerning the development of American trade 



Tlie Proposal for a Tariff Commission 189 

in foreign countries. On the other hand, the newly es- 
tablished Federal Trade Commission is making inquiries of 
its own concerning the possible development of foreign trade. 
A number of agencies are working upon various phases of 
the same general problem. 

There is thus a large body of more or less scattered in- 
formation which would be useful to Congress. And notwith- 
standing this multiplicity of agencies, there remains informa- 
tion which a committee of Congress would wish to have and 
which can not now be had, or, at all events, is not readily 
accessible. A single body, having the duty of collating and 
coordinating the available information, and equipped to se- 
cure such further information as might be desired, could 
render important service. Further, it is at least possible 
that such a body should be given administrative functions 
or some powers of supervision and coordination, and should 
thus be of service not only to Congress but to the executive 
departments also. 

There are two possible ways of gathering and coordinat- 
ing the desired information. It might be done by a purely 
executive board or sub-department; say, a bureau consisting 
of permanent officials in the Treasury Department or in the 
Department of Commerce. Something of the sort exists 
in the Bureau of Foreign and Domestic Commerce recently 
established in the Department of Commerce. Under this 
arrangement the information would be given to Congress 
not by an independent tariff board, but by permanent officials 
regularly serving in the executive departments. The alterna- 
tive is that of an independent board having no direct ad- 
ministrative duties and no close affiliation with any existing 
department, but serving as a sort of clearing house and or- 
ganizer, and responsible to Congress alone. 

On general principles there is much in favor of the first 
plan. It would seem, indeed, that the very object for which 
the various officials in the different departments exist is not 



190 Free Trade, the Tariff and Reciprocity 

simply the administration of existing laws but the considera- 
tion and suggestion of improvements in them. Unfortu- 
nately, the traditions of American political life present se- 
rious obstacles to the assignment of such functions to the 
department officials. The higher administrative appoint- 
ments in all departments are regarded as political. With 
every Administration the personnel changes. Not only the 
members of the Cabinet, but all the responsible and well-paid 
officials are shifted with every political overturn. That this 
is a serious evil, and one that grows more serious with the 
increasing complexity of legislative problems, is recognized 
by every intelligent observer. The great bane of American 
politics is the absence of good permanent positions. The 
good positions are not permanent, and the permanent posi- 
tions are not good. It is only the minor posts, whose salaries 
are not large enough to constitute political plums, that are 
left to permanent officials. And yet these obscure permanent 
officials, because often they alone are experienced and well- 
informed, have great influence in shaping current adminis- 
trative practice and the details of legislation as well. It has 
been said with truth that the Government of the United 
States is run by $1,500 clerks. We have sore need in our 
public service of a body of able, well-paid, permanent offi- 
cials, whose positions shall not be affected by party changes, 
who shall not simply follow in mechanical fashion the prece- 
dents of their offices as they have found them, who shall be 
able to give intelligent advice as well as useful information. 
Nevertheless, it will be urged, and with much force, that 
under the existing traditions of our political life the only 
way to secure a permanent, dignified, able, non-partisan body 
is through the establishment of an independent board. A 
board composed of administrative officials would necessarily 
be subordinate to the heads of the several Cabinet depart- 
ments, and would be supposed to be under their political in- 
fluence. To have the desired non-partisan and impartial 



The Proposal for a Tariff Commission 191 

character, it is said that a tariff board must be composed 
of new appointees — independent persons, and men of larger 
caliber than can now be expected as sub-officials in the de- 
partments. One's attitude on a problem of this sort is neces- 
sarily influenced by one's general expectations and hopes on 
political matters. Will there never be in our Federal serv- 
ice a permanent body of officials, experts in their subjects, not 
changing with every Administration? Will public service 
never offer a professional career to men of large ability? 
Will all the good places in the departments always remain 
within the spoils system ? I can understand that, in view of 
the rooted habits of the present and the past, it may be con- 
cluded that permanent expert service on the tariff can be got 
only by the establishment of a separate commission. I hope 
for myself that we shall learn to make our regular admin- 
istrative machinery better, that we shall improve the existing 
system step by step instead of getting round it step by step. 
But it is easy to understand the attitude of those who believe 
existing traditions and ways, even though admittedly bad, 
to be so strongly intrenched as to make it hopeless to attack 
them directly. 

The essential thing is that we should have a permanent 
and really non-partisan set of officials whose first duty should 
be to assist Congress in the intelligent and careful framing 
of tariff legislation. Its main function should not be to give 
advice to Congress upon questions of policy, or to undertake 
investigations which rest upon the assumption that some 
particular policy is to be carried out. It has been proposed, 
for example, to establish a tariff commission whose most con- 
spicuous duty should be to ascertain the difference between 
cost of production in the United States and cost of produc- 
tion in foreign countries; the assumption being that this is 
the basis upon which tariff legislation ought to be constructed. 
It is tolerably certain that a tariff commission which pro- 
ceeded on a basis of this sort, and whose functions were 



192 Free Trade, the Tariff and Reciprocity 

mainly concerned with investigations implying the applica- 
tion of this principle, would be under suspicion, and would 
probably be turned out whenever a political party came in 
by whom this particular principle was not accepted. And, 
similarly, any commission which is established as a move in 
the political game, even though not overtly for any specified 
sort of investigation, will be under suspicion, and will be 
given a cold shoulder when a new party comes in. This was 
precisely the case with the Tariff Board of the Taft Admin- 
istration. It was a good board, and it did good work. But 
it was regarded, not unnaturally, as a device of the Kepub- 
licans, and it was consequently dropped when the Democrats 
came. If we are really to have a useful, permanent, non- 
partisan board, it must be appointed in such a way, and its 
duties must be defined in such a way, as to make clear its 
purely advisory and non-political functions. Necessarily, 
much would depend upon its personnel ; but much also would 
depend upon the attitude of the political parties at the time 
of its establishment. If its establishment is simply a polit- 
ical move by one party or the other, it is almost certainly 
doomed to failure. 

It does not follow that a tariff board can be of no service 
whatever in guiding Congress and the country on the larger 
and more difficult questions of industrial policy. It could un- 
dertake investigations on the character and the development 
of American industries, on the conditions of competition be- 
tween foreign and domestic industries, on the prospects of 
growth and development for American industries, which 
would throw light on disputed questions of industrial policy. 
Investigations of this sort, however, take time, and are more 
likely to be carried out with sole regard to the ascertainment 
of the facts if they are not undertaken with direct reference 
to any impending legislation or proposals for legislation. 
They should be conducted slowly, quietly, without any flour- 
ish of trumpets. They are more likely to command the re- 



The Proposal for a Tariff Commission 193 

spect of Congress and of the public if carried on by a board 
which had already established its usefulness and its impartial 
spirit by routine work more nearly of an administrative sort. 
The more ambitious and high sounding its duties, the less 
likely is it to be really successful. Let it be given mainly 
the function of assisting Congress in the intelligent elabora- 
tion of whatever policy the country has decided to follow, 
and make no pretense of removing the determination of pol- 
icy from the quarter where in the end it necessarily belongs : 
Congress and the voters. 



XI 
TARIFF PROBLEMS AFTER THE WAR * 

This paper, dealing with the tariff problems that will arise 
in consequence of war disturbances, will be restricted to such 
as have a direct and close connection with tariff legislation. 
There is no occasion for considering here those abnormal con- 
ditions which have only an indirect bearing upon tariff leg- 
islation — the extraordinary development of the munition- 
works, or the unusual conditions with regard to the supply 
of some raw materials, like hides and leather. Many in- 
dustries for whose products there has been a marked war de- 
mand will have to face problems of readjustment after the 
war. But tariff legislation can do little for the war babies. 
For tariff purposes it is the non-war industries that call for 
attention — those which have been stimulated by the restric- 
tion or disappearance of imports. Many articles formerly 
obtained from abroad have come to be made in the United 
States. What is to happen to the industries which now pro- 
vide them ? On what principles shall we proceed in readjust- 
ing tariff rates on commodities which were imported before 
the war, and not improbably will be again imported after the 
war, if tariff duties remain as they were before ? 

A kindred question, and indeed in many respects the same 
question, is whether the United States shall in the future aim 
to be an economically independent country, self-contained 
and self-sufficing. Shall we look forward to a resumption of 
international trade on substantially the same lines as were 

i Reprinted bj T permission of the publishers, E. P. Dutton k Co., from 
the volume on American Problems of Reconstruction, second edition, 
1919. 

194 



J 



Tariff Problems After the War 195 

followed in the past, or to a world order entirely new? It 
is inevitable that foreign trade shall be in some important 
respects very different from what it was before. But how 
great is the change likely to be and how far shall we endeavor 
to regulate it and control it? In some quarters there is ex- 
pectation of a great expansion of exports after the war, a 
great increase of foreign investments, a great development 
of the mercantile marine and of the carrying trade, close con- 
nection of the United States with industrial matters abroad 
as well as with foreign politics. Others look forward to a 
diminution of imports, to less reliance upon foreign supply, 
to domestic production of things formerly bought abroad, to 
the maximum of industrial independence and self-sufficiency. 
These are very different expectations and very different points 
of view. They are not readily to be reconciled. If exports 
greatly increase, so will imports. If imports are much re- 
duced, exports also must be expected to shrink. The policy 
which we shall follow with regard to tariff legislation must 
be consistent with our policy in the wider political and in- 
dustrial problems involved. 

The terms " self-sufficiency " and " economic indepen- 
dence " are vague. No one would propose to cut off foreign 
trade entirely. Whatever our tariff policy, we shall con- 
tinue to export largely and to import largely. True, it is 
tolerably certain that the relation between exports and im- 
ports will not be the same as it was before the war. We 
are not likely to have the remarkable excess of merchandise 
exports, or so-called " favorable " balance of trade, which 
the records have shown for the last thirty or forty years. 
In any case we shall import on a great scale. If there is to 
be that increase of exports, absolute and relative, which is 
confidently expected in many quarters, we shall import in 
even greater quantities than before. Whatever the future 
relation between imports and exports, foreign trade is certain 
to remain a large factor in our industrial organization. 



196 Free Trade, the Tariff and Reciprocity 

Complete self-sufficiency, in the sense of domestic production 
of everything we use, is out of the question, and in any case 
it is inconsistent with the ambition for an expanding export 
trade. " Economic independence " is a matter of degree. 

Imported goods — those imported in the past and those 
which may continue to be imported in the future — are di- 
visible into three classes, which may be styled, resepectively, 
the military, the essential, the non-essential. The line be- 
tween one and the other of the three cannot always be drawn 
with precision. There will be differences of opinion on the 
place of many a commodity in one or the other of them. 
But they are broadly separable; and the tariff situation 
will be made clearer if they are taken up one by one. 

The first class, military commodities, includes things 
needed directly for war purposes, such as rifles, artillery, 
munitions. The second, the essentials, include things not 
indeed needed primarily for military use, but of vital im- 
portance to the life of the nation. Such are the fundamental 
food materials, fuel, clothing materials, timber. With re- 
gard to these, the question whether their domestic produc- 
tion be deemed essential is affected by the possibility of ob- 
taining or increasing a supply with comparative ease and 
speed. A thing may be essential ; yet if the needed supply 
can be rapidly secured when needed, it is no great matter 
if we do not now possess a stock. The third class ranges 
all the way from luxuries which are clearly superfluous to 
conveniences and comforts which habit has made it difficult 
to dispense with. 

I. MILITARY ARTICLES 

As regards the first class, guns, powder, military equip- 
ment, explosives, armor plate, and the like, the principle is 
simple. Tt is obvious that there must not be complete de- 
pendence on foreign sources of supply. The only disput- 






Tariff Problems After the War 197 

able question is whether munitions shall be manufactured by 
the Government directly or by private industries to be sup- 
ported by government aid if unable to hold their own without 
it. If private industries are subsidized or supported, there 
must be some control and regulation of their profits. As to 
such things practically no one would advocate a policy of 
complete dependence on imports. 

The principle is simple and clear. But how far shall we 
carry it? Shall we go so far as to assure the production 
within our borders of the entire supply of every item needed 
for great military and naval establishments ? 

During the early stages of the European war this ques- 
tion was raised in connection with our own great exports of 
munitions. We were then neutral; we were selling muni- 
tions on a great scale to warring countries. Under inter- 
national law our right to do so was clear. It is as well set- 
tled as anything in international law that a neutral nation 
may lawfully allow its citizens to sell munitions and any 
contraband of war to belligerents — subject, of course, to the 
chance of capture. But many people asked, is this rule of 
international law, settled though it be, a good one ? Should 
the law be modified? It was argued that the extraordinary 
scale of our exports showed the sale of munitions to be in 
effect unneutral, and inconsistent with a real regard for good 
order and peace. The answer made — by Mr. Taft, for ex- 
ample — was that such transactions were not unneutral, be- 
ing in effect conducive to peace, not to war. Quite apart 
from the question of making a change during the very time 
of war, and in such way as necessarily and deliberately to 
influence the fortunes of the conflict then raging, the point 
was made that if a belligerent country could not buy muni- 
tions from neutrals, it must be prepared to supply its needs 
entirely and once for all from its own resources. It must 
make for itself, or store on a great scale, cannon, rifles, ex- 
plosives, all munitions. No such vast preparation would be 



198 Free Trade, the Tariff and Reciprocity 

necessary if it could purchase from neutrals. A country 
which looks to peace, hopes for peace, works for peace, should 
not consistently adopt a policy of the most thoroughgoing 
preparation for war. The argument which thus defended 
the position of the United States in the international con- 
troversy evidently ran counter to a program of all-embracing 
preparation. It assumed that even for direct military pur- 
poses something short of self-sufficiency might be in accord 
with the best international policy. Even here, it thus ap- 
pears, are some questions of degree, some stretches of de- 
batable ground. Complete dependence on foreigners for the 
apparatus of war is not conceivable for a great nation; but 
absolute self-sufficiency is not necessarily the wisest policy. 

In the same class as munitions in the strict sense would be 
placed materials indispensable for military supply and equip- 
ment. Of these, at least a minimum needed for the supply 
of the army and navy should be produced at home. Among 
such are iron and steel, copper, leather, wool. To be abso- 
lutely dependent upon foreign countries for them is to be 
under a grave military disadvantage. But in this regard 
there is no serious difficulty for the United States. Under 
any circumstances we shall produce enough to supply the 
strictly military needs. Conceivably the civilian population 
might be inconvenienced in time of war, possibly subjected to 
positive suffering, because of a lack of these fundamentals; 
as was the case in Germany because of the lack of wool and 
leather. But the civilian supply raises a different set of 
problems, to be considered under our second head. So far 
as concerns military needs proper, the United States needs 
to be watchful concerning its supply of the guns, the ex- 
plosives, the war ships; but as regards most raw materials, 
and as regards the plant, equipment, and machinery neces- 
sary for working them up, the situation need cause no fore- 
boding. 

A difficult question arises concerning some articles of 









Tariff Problems After the War 199 

minor quantitative importance, which are not readily obtain- 
able by domestic production, perhaps are not so obtainable at 
all, yet are important for military purposes. Such are nickel 
and tungsten, used in hardening the ferrous metals ; antimony, 
used for shrapnel shells ; quicksilver, indispensable for filing 
any kind of ammunition; nitrogen (ordinarily in the form 
of nitrates), of the first importance in the manufacture of 
explosives. We have practically no nickel, no deposits of ni- 
trates, sparse deposits of antimony, uncertain ones of tung- 
sten and of quicksilver. What is the best way of making 
military provision ? 

There are two ways. One is to stimulate domestic pro- 
duction by tariff duties or bounties, or by the equivalent of 
bounties through government purchase at guaranteed prices. 
The other is the accumulation by the Government of a large 
fixed stock or reserve, to be kept always in hand and to be 
available at once in case of war. The choice between the two 
is sometimes confused by an advocacy of domestic supply 
and of protection to domestic producers, on grounds of gen- 
eral industrial policy. It is urged we should not be de- 
pendent on foreigners for these articles ; u dependence " being 
used with the same implications as the term would suggest 
in the case of non-essentials like toys or chinaware. General 
arguments for protection are interwoven with the specific 
arguments for military preparedness. From the military 
point of view, much is to be said in favor of the policy of 
accumulating an ample store ; it is more secure than are mea- 
ger domestic mines and deposits. Such domestic sources of 
supply are subject to political as well as physical vicissitudes. 
A protective policy, even though instituted with an eye to 
military needs, may be given up when a long period of peace 
has obliterated the traditions of warlike preparation. 

A peculiar case under this head is that of the coal-tar in- 
dustries, which furnish at once dyestuffs and explosives. 
The Germans, as we all know, had a unique command of 



200 Free Trade, the Tariff and Reciprocity 

them — a dominance such as they had in no other manufac- 
turing industry. Dyestuffs in themselves do not belong in 
the military class ; indeed, do not seem to belong even in the 
essential class. Though often spoken of as essentials for tex- 
tile manufactures, they can hardly be said to be indispensable 
to the life of the nation or even to its comfort. True, a tex- 
tile concern which lacks good dyestuffs must go to the wall if 
its competitors are supplied with them; but if all alike are 
cut off, the consequence is simply that the community, and es- 
pecially the women, will have to get on with fabrics not quite 
so alluring and tempting, perhaps not quite so fast in color, 
as they might be. The ground for considering articles of 
this kind in connection with military needs is the close in- 
terrelation between explosives and dyestuffs in the coal-tar 
industry. It is not entirely true, as is sometimes intimated, 
that a dyestuffs-plant can be converted into an explosive-plant 
over-night. But true it is that the early steps, and many of 
the intermediate steps, in the production from coal-tar of 
dyestuffs and of some important explosives, are the same. At 
a point in the processes which is considerably advanced there 
can readily be a diversion in one direction or the other — 
either to the manufacture of dyestuffs or to the manufacture 
of the shell-filling high explosives. Not only has the same 
plant much apparatus which is available for both purposes, 
but the same set of trained chemists and skilled workmen can 
be used. The possibility of alternative use is thus one of 
degree, of flexibility ; and the feasibility of transfer to mili- 
tary uses is sometimes exaggerated. Explosives as a rule 
are greater in bulk than the related dyestuffs ; under ordinary 
circumstances some readjustment of plant is necessary for 
getting a supply of explosives from a dyestuffs-plant. But 
after all qualifications are made, a strong argument remains 
in favor of regarding the dyestuffs manufacture as potentially 
a military industry. It has the further advantage of being 
a military industry which can be utilized in times of peace. 



Tariff Problems After the War 201 

There is no question that early in the war the German dye- 
stuffs-plants were turned to the production of explosives. It 
is urged that such utilization of them was deliberately had in 
view, as one of the many preparations for the great war. 
And it is well known that the larger American manufacturers 
of explosives have turned to the production of dyestuffs as 
an industry for times of peace. 

There are other reasons — to digress for a moment — why 
the dyestuffs industry stands by itself. Not so much that it 
is a " key " industry ; the extent to which dyestuffs dominate 
the textile and other manufactures is often exaggerated. But 
the complete control in the industry which the Germans aimed 
at before the war, and largely succeeded in securing, threat- 
ened consequences which the most convinced free-trader must 
regard with apprehension. Combinations in the nature of 
gentlemen's agreements were in effect even then between the 
different concerns. Now, as all advices indicate, there is a 
firm kartell, or tight combination. Here is a foreign monop- 
oly — a real monopoly, and not merely (what is often styled 
a monopoly) localization in a foreign country of an industry 
within which there are many competing concerns. A solid 
German kartell in the coal-tar industry is pretty sure to be a 
strenuous competitor. It may try to crush competition in 
foreign countries by selling at cost or below cost, and then re- 
coup by advanced prices when the competitors are destroyed. 
Possibilities of this sort are often paraded as a bugaboo by 
extreme protectionists, when the facts give little occasion 
for concern. But here is a case where there may be veritable 
need for industrial self-defense. 

And yet it remains, in some respects, a puzzling case. The 
German concerns have been ruthless competitors, and may 
still be. Yet they have also been, and perhaps will remain, 
more efficient producers than their rivals in other countries. 
They do the job well. They make good dyestuffs, and make 
them (certainly did make them) cheaper than competitors 



202 Free Trade, the Tariff and Reciprocity 






abroad. Industrial, technical, social conditions favored the 
industry in Germany as nowhere else. To shut the Germans 
out entirely would seem of doubtful advantage to the rest of 
the world. A middle ground should be found between com- 
plete exclusion and unfettered freedom. Possibly, and much 
to be desired, is some international agreement providing for 
fair competition, no deliberate dumping, no cut-throat in- 
dustrial warfare; a consummation depending on the kind of 
peace — a true peace, a real concord of nations? — which 
shall be eventually secured. 

Still another consideration must be borne in mind. The 
complete dependence on a single country for the main dye- 
stuffs, of which we became unpleasantly aware in 1915, i$ 
not likely to be again experienced. Other countries, no less 
than the United States, are concerned that this situation shall 
not recur, and are developing dyestuffs industries of their 
own ; notably Great Britain and France. Switzerland, long 
the seat of a dyestuffs industry, will remain so. In the fu- 
ture there will be competition between manufacturers in dif- 
ferent nations to a vastly greater degree than before the war, 
and hence no longer a reliance on any one source of supply. 
The chance that all sources will suddenly be cut off from 
the United States is almost negligible. Even if there be 
much reliance on imported supplies, the conditions will be 
less fraught with danger than those which prevailed before 
the war. 



II. ESSENTIAL ARTICLES 

Next, the second class of commodities : essentials for the 
civilian population. Shall the nation be quite independent 
of foreign supplies for its grain and its meat, its wool, leather, 
cotton, coal, copper, iron, and steel ? The problem for many 
countries, and indeed for most countries, is complex and 
difficult. Italy has no coal ; in what way shall she make pro- 



Tariff Problems After the War 203 

vision for the possible curtailment of foreign supplies of 
coal in case of war? Italy is no less lacking in iron and 
steel. France has no copper; Germany very little. Ger- 
many cannot be self-sufficing as regards many commodities — 
not only copper, but wool, leather, cotton — without huge and 
now impossible expansion. Neither can Trance or Italy or 
Austria. The British Isles are self-sufficing only as regards 
coal and iron. Foodstuffs and raw materials of all kinds 
must be obtained by the British from overseas — either from 
foreign countries or from colonies or self-governing domin- 
ions. Tariff protection for these materials and their do- 
mestic production would mean a crippling of British manu- 
facturing industries. And in many cases tariff protection 
could not possibly achieve self-sufficiency. 

But this phase of the problem need cause the United States 
less concern than other nations. We are fortunate in being 
able to procure within our own borders grain, meat, coal, iron, 
copper, timber, cotton, wool, leather, in quantities^ sufficient 
for our essential needs. True, we do import some important 
materials in considerable amounts, such as wool and hides. 
But we are not so dependent on foreign supply as to be in a 
position of imminent peril or serious suffering, even though 
the foreign supply should be entirely cut off. 

There are some things, however, which may give us occa- 
sion for concern, or at least for sober reflection. How far 
they are absolutely essential, may be an open question. But 
there are much needed articles for which we were quite de- 
pendent on foreign countries before the war. A typical case 
is that of potash. The potash situation is peculiar in that 
here also Germany had a monopoly. And the monopoly had 
been for some time a true monopoly, not merely a geograph- 
ical concentration of supply. There was a strong kartell, in 
which the Prussian Government, as mine-owner and producer, 
had a controlling influence. Potash is mined in great quan- 
tities from the remarkable German and Alsatian deposits, 



204 Free Trade, the Tariff and Reciprocity 

and has been exported by the Germans to many parts 
of the world. The United States has been the largest among 
the foreign purchasers. The Germans think it is indispens- 
able to us — as indispensable to us as our cotton is to their 
textile industry. Potash in exchange for cotton — this was 
their bargaining cry. 

Potash is used for manufacturing purposes, as well as for 
agriculture. It is important, for instance, for some branches 
of glass manufacture ; for matches and some kinds of explo- 
sives ; for making soft soaps. As regards these uses no com- 
pletely satisfactory substitute is available. In other indus- 
tries, though convenient, it is replaceable by satisfactory sub- 
stitutes. But for all the manufacturing uses taken together 
the quantitative demand is not considerable, and probably can 
be met without serious difficulty from domestic resources. 
Potash in small amounts can be got from certain brine de- 
posits in Utah and the western part of Nebraska, and in prob- 
ably larger quantities from the analogous deposit at Searles 
Lake in California. Some can also be got from alunite, 
greensand, wool scourings, distiller's and sugar-beet-factory 
wastes, as well as from the giant kelp which fringes parts of 
our western coast. Still other important potential sources 
of supply are cement dust and dust from blast furnaces. 
The cost of producing potash from many of these sources 
will probably be much higher than the pre-war prices of the 
imported potash ; but since no considerable amounts are used 
for any single manufacturing purpose, higher price of the 
material would not be of vital consequence. 

It is in agriculture that really large supplies are needed, 
and are needed at low prices. Of the pre-war imports ninety- 
five per cent went into fertilizers. And the plain fact must 
be faced that, so far as agricultural needs are concerned, there 
is nothing now in sight effectively to break the German mo- 
nopoly. The 226,000 tons of actual potash which were being 
used for fertilizer purposes before the war cannot be obtained 






: 



Tariff Problems After the War 205 

for some time from any visible sources except the German 
mines, for our total output for 1918 promises to be only about 
60,000 tons of actual potash. How far is the country in 
this regard vitally dependent on a foreign commodity ? 

Here is the situation. Over large areas of the South and 
East our agricultural crops are grown with the use of large 
supplies of fertilizers in which, excepting for temporary pe- 
riods, potash is an indispensable ingredient. Such is the case 
in the citrus groves of Florida and Porto Kico, in the potato 
areas of Maine and the Atlantic seaboard, the tobacco-fields 
of Kentucky and the Connecticut Valley, truck-garden re- 
gions from the Mississippi Eiver to the Atlantic and from the 
Gulf of Mexico to Canada, and in most of the cotton-fields 
east of the state of Mississippi. Potash is also needed for 
some crops in Ohio, Indiana, and other of the Middle- West- 
ern states, including many of the sandy potato soils of Wis- 
consin and Minnesota, as well as the great areas of peat soils 
in all parts of the country. In these regions its lack means 
serious embarrassment and need of difficult readjustment. 
But fortunately American agriculture in general is not so 
seriously dependent. In the great Central region of the 
country, potash is only needed here and there for special 
crops, such as potatoes, onions, and tobacco. The heart of 
the country is almost completely independent of this partic- 
ular plant food. As time goes on, and the inevitable transi- 
tion to more intensive cultivation takes place, American ag- 
riculture not only in the East and South, but also west of the 
Alleghenies, if it is to meet the food requirements of a rap- 
idly increasing population, will indeed need increasing sup- 
plies of phosphates, of nitrogen, and of potash also. But 
this ultimate need is not a matter for present concern. Dur- 
ing the period of readjustment after the war, the country as 
a whole will be more dependent on artificial fertilizers than 
it has been in the past. 

In the regions which may be called dependent, again, the 



206 Free Trade, the Tariff and Reciprocity 

need of potash could be lessened, but not overcome, by a com- 
plete change of agricultural procedure. Our agricultural 
methods and crop specializations have been adjusted to the 
available fertilizer supplies and to the market demand for 
special crops. Fifty years ago, even thirty years ago, com- 
mercial fertilizers, though then they would have been valuable 
in the East and South, were little used. Extensive crop spe- 
cialization was practically in its infancy. It is not out of 
the question that there should be a return in some degree to 
the agricultural methods of former times: more barn-yard 
manure, a different rotation of crops, a self-sustaining agri- 
culture. Such a change, however, would entail all the diffi- 
culties of transition. Farmers are traditionally conservative, 
not easily moved from their existing ways, slow to accommo- 
date their methods of cultivation to new conditions. Not 
only this; farmers would probably find a self-sufficing agri- 
culture less profitable. It is doubtful, for example, whether 
a larger net money yield to the producer would be obtained 
if the cotton-planters of the South, instead of allowing their 
cotton-seed cake to go to Europe or to other parts of the coun- 
try, were to use it for their own cattle and were to turn their 
attention to dairying and meat production to that extent. 
If the supply of potash or indeed of other fertilizer were to 
be permanently cut off, a readjustment in this direction would 
be inevitable ; but it would be by no means necessarily profit- 
able. 

The confidence which the Germans exhibited when talk- 
ing about their potash was in keeping with the self-deception 
which did so much to plunge them into false moves in every 
direction, economic as well as diplomatic and military. Per- 
haps their attitude was no more than braggadocio — not so 
much self-deception as an attempt to deceive others. Their 
potash is highly acceptable under present agricultural prac- 
tices ; but it is by no means indispensable. Should they shut 



Tariff Problems After the War 207 

it off from the United States and other countries, agriculture 
would gradually adjust itself to new conditions based upon 
a different cultivation and in part upon the cost of recovering 
by-product potash from various industries. Meanwhile the 
search for other underground deposits, already initiated the 
world over, would be prosecuted the more eagerly, with a 
strong probability that, as is commonly the case with ma- 
terials thought to be unique, competitive sources of supply 
will be discovered. Indeed, similar deposits are already re- 
ported to have been found in Russia, Spain and Abyssinia. 
Most of all, the recovery of Alsace by France opens the one 
natural source of supply which is known to be comparable to 
that of Germany. The Alsatian beds are large m quantity 
and excellent in quality. Opened and developed by the Ger- 
mans themselves shortly before the war, they constituted at 
its close the one effective competitor to the German kartell. 
The sort of economic warfare and would-be strangulation 
implied in the quest for control of essential materials and 
« key industries " is to my mind abhorrent. It is not to be 
thought of as part of a peace that shall really terminate the 
great war. But if it must be faced as among the possibilities 
of an inconclusive settlement, the United States is in a 
stronger position to let it go on than any other country. So 
far as concerns potash, which illustrates best our own inade- 
quacies and needs, we may be composed. After the war, we 
shall probably be quite willing to admit it free of duty as we 
did before the war. If the Germans should be so foolish as 
to prohibit its export to us — a most unlikely contingency in 
the final settlement — we should quietly accept the situation, 
readjust our own affairs accordingly, and, if there must be 
economic war, resort to retaliation more effective than any 
possible thrust directed against ourselves. 



208 Free Trade* the Tariff and Reciprocity 

III. NON-ESSENTIAL ARTICLES. THE TARIFF CONTROVERSY 

In the third class, that of non-essentials, belong a number 
of articles which in pre-war times were imported from Eu- 
rope, and after the peace probably would continue to be im- 
ported under the existing scale of duties — those of the tariff 
act of 1913. Such are the more expensive grades of woven 
textiles — woolens, cottons, silks, linens ; the finer grades of 
cotton yarns ; embroideries and laces ; a good deal of porcelain 
and chinaware, and a few (not many) kinds of glassware; 
toys from Germany ; brushes for toilet use ; cotton and leather 
gloves for women ; notions, buttons, and so on through a long 
list. Many are clearly articles of luxury ; others are dispen- 
sable conveniences. Some have come to be made in this coun- 
try during the period of disjointed foreign trade, but not a 
few have continued to be imported through it all. 

Still other things may be put in the same class, namely, 
those which, though perhaps deemed to be essential, need 
cause no concern because their domestic production can be 
undertaken or expanded in a short period of time. Labora- 
tory glassware, for example, was formerly obtained almost 
exclusively by importation, and chiefly from Germany ; a large 
proportion of the imports was admitted free of duty because 
used by educational establishments. Almost all the forms 
and shapes are now made within the country, of excellent 
quality. But they are not sold at as low a price as that of 
former imports; and it is possible, even probable, that after 
the war the same disparity in price will remain, and imports 
will be resumed. Being usually of special shape, made in 
small lots of any one pattern and with much hand-labor, they 
are produced more cheaply in countries where wages are 
lower and where special skill of the needed sort can be had at 
a moderate rate. On the other hand, the increase of supply 
in this country took place very quickly under war conditions, 
and doubtless would take place again under similar conditions 



Tariff Problems After the War 209 

in the future. The case is much the same with optical glass 
and spectacle glass. It is quite feasible to make these within 
our own borders ; but under the normal conditions of foreign 
trade they are obtained more cheaply by importation, and for 
the same fundamental reason — in the main they are prod- 
ucts of handicraft labor. Surgical instruments, too, came 
mainly from Germany before the war; they too, like muni- 
tions of war, have been turned out by domestic producers in 
large quantities in response to a sudden demand. 

As regards all these articles, whether non-essential or pro- 
ducible at home on short notice, quite a different problem 
arises, and quite a different train of reasoning must be fol- 
lowed. The protective controversy pure and simple must be 
faced. The thoroughgoing protectionist view is that the pre- 
vious importation of any commodities which could have been 
made at home was always bad, and that the stimulation of 
domestic production, fortuitous though it may have been, was 
in itself good. From this point of view, the dependence upon 
foreign supply had always been a cause of economic loss ; the 
interruption of foreign supply because of the war served only 
to bring out clearly the economic disadvantage of the situa- 
tion. And from this point of view, too, the resulting incon- 
venience and distress were a blessing in disguise. We have 
been compelled to face squarely a serious situation. The 
country should be independent and self-sustaining always and 
in every possible direction, not merely on political and mili- 
tary grounds, but on purely economic grounds. The same 
trend of opinion will appear in all the countries which have 
had a protective policy; they will have to consider whether 
protection is to be maintained, extended, or mitigated. Not 
only in the United States, but in other countries, those who 
believe that the substitution of domestic production for im- 
ports brings in itself unfailing gain, will seek support for 
their contentions from the war experiences; and everywhere 
they will call for higher tariff rates, 



210 Free Trade', the Tariff and Reciprocity 

And, as I have already intimated when speaking of th6 
military commodities, there will be some confusion of thought 
between this frank and uncompromising protectionism on the 
one hand, and political and military preparedness on the 
other. Many persons will be eager to make their country 
self-sufficing, independent, safe; they will be averse to for- 
eign supply on grounds partly patriotic, in part sometimes 
selfish. They will believe it a conclusive proof of national 
gain that a thing is made at home instead of being brought 
from abroad; they will hold the foreign purchase specially 
damaging if made from a present rival, and ominous of- dis- 
aster if made from a former enemy. If they are themselves 
producers of articles affected by foreign competition, they will 
not be loath to fan international jealousy and commercial 
strife. On every ground — political, military, economic, sen- 
timental — they will argue that all things should be made at 
home that can possibly be made at home, and most insistently 
will urge that every newly stimulated industry should be 
safeguarded by ample tariff protection. 

The free-trader, upon the other hand, will maintain that on 
strictly economic grounds, and quite apart from any ques- 
tions of political expediency or international sentiment, the 
matter should be treated as simply involving a balance be- 
tween gain and loss. He will argue that the continued im- 
portation of a commodity in times of peace is in itself a sign 
not of loss but of gain. Imported goods are paid for, not 
through a losing trade in which we part with so much money, 
but in exchange for exported goods; and they are obtained 
presumably on better terms when got in exchange for the ex- 
ports than if they were produced at home. True, war brings 
a temporary loss — rude interruption and sudden cessation 
of supplies, improvised substitutes, higher prices, domestic 
production under forced and perhaps wasteful conditions. 
The sudden transfer of labor and capital to new industries 
takes place with a loss of efficiency and with much waste; the 



Tariff Problems After the War 211 

succeeding readjustment, if imports are resumed after the 
war, again entails loss and waste. Here, and here only — 
in the wastes of sudden changes — is the offset to the presum- 
able gain from free international trade. In the long run, a 
country does not lose by free imports, but gains. 

An analogy, from the free-trader's point of view, is found 
in the interruption of traffic on a railway or street railway 
during a strike — something which is often talked of as in- 
dustrial warfare. During the interruption of traffic, when 
the existing facilities are unavailable, there is resort to sub- 
stitutes less efficient and more expensive. Jitneys and ex- 
press-wagons replace street-cars. But such losses, possible 
and real, are more than offset by the continuing benefits which 
improved methods of transportation bring in ordinary times. 
No one would propose to dispense with railways or street rail- 
ways because their services may be interrupted by civil com- 
motion. To be sure, if such commotion had to be reckoned 
with as part of the ordinary course of events, we might be 
skeptical of the expediency of relying upon means of com- 
munication likely to become frequently and repeatedly inop- 
erative. And so with regard to war and international trade : 
our attitude is influenced profoundly by our expectation of 
the future of war and peace between nations. _ _ 

Between these extremes there are various shades of opinion. 
There is the moderate free-trader, who has long shed any no- 
tions about natural rights to free trade, and has also discarded 
the belief that the cure for war can be found m universal 
free trade. Such a person, too, is likely to admit freely the 
possibility of gain from protection under some conditions — 
say, those of protection of young industries. He must be 
impressed also by the portentous changes now brewing in 
the international order. The world is different from what 
he wished and perhaps fancied. Not only is defense more 
important than opulence, to use Adam Smith s oft-quoted 
phrase, but opulence itself is threatened by the universal 



212 Free Trade, the Tariff and Reciprocity 

crash. How far we must reshape all our ideals and policies 
must depend upon the eventual outcome — whether the world 
is to be readjusted to a permanent peace or to everlasting 
struggle. But the dream of universal free and peaceful ex- 
change of goods has had a rude shock. The strictly economic 
arguments for protection usually admitted by the moderate 
free-trader — admitted by him to apply only under excep- 
tional conditions — are reenf orced by the hard facts of inter- 
national conflict, of national jealousy, insecure interchange of 
goods, cutthroat competition. Such a person would still re- 
sist, from intellectual conviction, the extreme policy of the 
uncompromising protectionist. But he would hold aloof also 
from the attitude of the uncompromising Cobdenite. 

Still another shade of opinion is that of the " reasonable " 
protectionists. These maintain a faith in protection, but 
would not carry it too far. No doubt the term " reasonable " 
is question-begging. The critic inquires at once what is 
meant by reasonable, and is apt to get only the equally am- 
biguous answer that it means, not too much. But at all 
events a protectionist of this type, though desirous of main- 
taining some dam against foreign competition, would repudi- 
ate the Chinese-wall suggestion. He looks for the eventual 
development and independence of domestic industries, some- 
what after the fashion of the free-trader who admits the 
young industries argument; yet he would not sacrifice any 
domestic industry once established, even though it continued 
to demand and need a considerable degree of protection indefi- 
nitely and forever. He is likely to be in favor of what is 
called the equalization of the conditions of production. Yet 
he would not equalize everything, and is disposed to accede to 
the continuance of imports where they would be kept out only 
by duties at very high rates. 

Which of these principles shall prevail, and which shall 
dominate the policy of the country during the generation fol- 
lowing the war, depends largely on political developments in 



Tariff Problems After the War 213 

the United States. What party will win in the elections of 
1920 ? The embers of the controversy on protection, buried 
for a while during the political truce which was maintained 
through the war, have been stirred once more. The old argu- 
ments have come forward, and the old issue will have to be 
faced again. There is not likely to be a clear-cut issue be- 
tween protection and free trade. But there will be one on 
the direction which the country's tariff policy shall take. 
Shall we move toward higher duties, stringent provision 
against foreign competition, watchful aid to every industry 
that has been stimulated by the war, building up of every one 
not absolutely impracticable because of climatic or physical 
obstacles? Or shall the trend be toward an acceptance of 
foreign competition as healthy, in the main beneficial, not to 
be jealously excluded; toward sharp scrutiny of the claims 
and profits of protected industries, and vigilant care for the 
consumer ? The march of events must be awaited. 

This conclusion — which states a question, not an answer 
— is not a satisfactory outcome of a discussion of reconstruc- 
tion problems. Yet the plain facts of the situation must be 
faced. No one can predict with assurance the political fu- 
ture, and no one can now lay down the lines of a policy for 
tariff reconstruction. A period of controversy, partisan de- 
bate, uncertainty in legislation, is inevitable. It is possible, 
and certainly much to be desired, that some matters not neces- 
sarily involved in the general debate may be settled on non- 
partisan lines ; such as the methods of provision for military 
commodities, and perhaps the tariff for specially situated in- 
dustries like the manufacture of dyestuffs. But it remains to 
be seen what will be done even on matters such as these ; and 
on the wider questions of industrial policy, we must simply 
wait and see what the future will bring. 

Further, much must depend upon the kind of peace with 
which the great war ends. Is it to be a peace of victory and 
conquest, or a peace of understanding ? A sullen truce, or a 



214 Free Trade, the Tariff and Reciprocity 






whole-hearted settlement ? Will it include commercial peace, 
or give play for continued commercial war? There will be 
strong pressure for the tightening of national bonds, for mov- 
ing toward the goal of self-sufficiency, for more rigorous pro- 
tection. A peace which is in the nature of a truce will make 
this pressure stronger. A peace of understanding will 
strengthen the hands of those who welcome the development 
of foreign trade and look to it, not indeed as the panacea of 
peace, but as the natural and welcome concomitant of peace. 

IV. THE TARIFF COMMISSION AND THE TARIFF 

It does not follow from all this that nothing at all can be 
done. It may not be possible — in my judgment it is not 
possible — to lay down now a policy of tariff reconstruction. 
But we can make preparation for the intelligent carrying out 
of whatever policy the country shall finally adopt. Precisely 
this sort of preparation the United States Tariff Commission 
is undertaking to make. 

Hitherto in the consideration of tariff problems trust- 
worthy and accurate information has often been painfully 
lacking. The committees of Congress have been fairly 
swamped by conflicting statements, on matters pertinent and 
not pertinent. They have heard unending testimony on both 
sides. They have found it beyond the limits of physical pos- 
sibility to deliberate and discriminate, to separate the wheat 
from the chaff, to ascertain what were the unquestionable 
facts, still more to ascertain which facts were significant. 
Complete information on the contested questions has almost 
invariably proved difficult to obtain. Sometimes, it must 
frankly be confessed, information really complete may be 
quite impossible to obtain. No tariff commission can pretend 
to be a perfect and inexhaustible encyclopedia of information. 
And yet it may conceivably perform functions of a somewhat 
encyclopedic sort. Given time, organization, foresight, and 



Tariff Problems After the War 215 

the way can be made ready for prompt and intelligent action. 
The existing commission has already begun the preparation 
of a catalogue of tariff information, and has put in charge of 
it a competent and trained statistician, already long ex- 
perienced in the work of the Census Bureau. If time is 
given, and the work of the commission proves as permanent 
as Congress has planned it to be, this catalogue will become a 
handy source of reference for pertinent information on the 
several phases of the tariff question. The design is to have 
on hand in it, in compact and simple form, all available data 
on the growth, development, and location of industries af- 
fected by the tariff, on the extent of domestic production and 
of imports, and on the conditions of competition between 
domestic and foreign products. To gather information of 
this sort and to present it in usable form is far from an easy 
task. Like any far-reaching scheme of investigation, it can- 
not be carried through suddenly or quickly. But given time, 
the commission means to have, and to keep continuously up to 
date, a body of information that will be of important service 
in the determination of tariff policies. This much can be 
accomplished and surely is worth accomplishing. 

Not a little has been said in discussion of the tariff situa- 
tion in general and of the Tariff Commission in particular 
about the desirability of a scientific policy. That term 
should be used with caution. In the field of political and 
social inquiry we have not reached that stage of scientific 
certainty which has been reached in many branches of natural 
science. The principles of economics can not be laid down 
in such terms and with such certainty as to enable us to formu- 
late commercial policies which rest upon settled foundations. 
But the term " scientific " may be used in a different sense 
from that in which it implies established principles and in- 
dubitable truths. In that other sense, it means simply that 
we shall proceed with care and method ; that we shall be 
accurate, painstaking, discriminating, shall refrain from 



216 Free Trade, the Tariff and Reciprocity 

guess, rumor, exaggeration, from vague and untested general 
statements. We proceed in a scientific way if we gather all 
the information we can, sift it with care, present it clearly, 
apply it intelligently. In this sense the operations of the 
Tariff Commission may fairly be expected to have a scientific 
character and prepare the way for a scientific treatment of 
tariff problems. 

And in this sense we can prepare for tariff reconstruction. 
The task of the Tariff Commission is not to take tariff ques- 
tions out of the hands of Congress, or to remove them from 
the realm of statesmanship. The determination of public 
policy in this direction, as in every other, must rest in the 
first instance with the legislature and ultimately with the 
people. Nobody, however expert, can settle, still less dic- 
tate, the position which the country shall take on controverted 
political and industrial questions. All that any administra- 
tive or investigating body can do is to contribute toward dis- 
criminating and intelligent discussion and action. 



INDEX 



Agricultural machinery exported, 

72. 
" Agrar-staat," 13. 
Aldrich, 136. 

American Economist, 35, 36. 
Andrew, 88 n. 
Australia, prices and wages, 83, 

84. 

Balance of trade, 97, 98; between 
U. S. and Canada, 98; with 
South America, 99. 

Bastable, 85 n. 

Beet sugar, 144. 

Brazil, reciprocity arrangement 
with, 112, 116; effects of a duty 
on Brazil coffee, 127, 128. 

Cairnes, 85 n., 89. 

California, prices and wages, 83, 
84. 

Canada, reciprocity relations, 111; 
balance of trade with U. S., 98. 

Chemical industry in Germany, 92. 

Civil War in United States, conse- 
quences of, 25, 31. 

Cobden, 29. 

Commercial treaties, of 1860 be- 
tween France and England, 1, 
124; of Germany in 1892, 125. 

Conference committee on tariff, its 
power, 184. 

Copper, exports from U. S., 50, 63. 

Cost of production and the tariff, 
Ch. 7 passim; equalization of, 
135. 

Cotton manufacture, growth in the 
South, 21. 

Cuba, reprocity treaty with U. S., 
111. 

217 



Curtiss, 34. 

Discriminating duties in favor of 
American goods, 111. 

Domestic commodities and their 
prices, 74. 

Domestic service, 80. 

Drawbacks and export bounties, 
115. 

Dye stuffs in relation to explo- 
sives, 200; general conditions of 
industry, 201. 

Dumping, 10, 108, 110. 

Edgeworth, 85 n. 

Efficiency and effectiveness distin- 
guished, 63, 101. 

England, industrial growth, 23, 25. 

Essential commodities, in relation 
to war problems, 202. 

Export bounties, on sugar, 11; in 
general bad, 104; in relation to 
drawbacks, 115. 

Export prices, lower than domes- 
tic, discus sed, 107. 

Export transportation rates, 105. 

France, tariff policy, 1, 2, 19. 

German economists on protection, 
26. 

Germany, industrial growth since 
1870, 20, 24; competition with 
Great Britain and relative 
wages, 53; chemical industry, 
92. 

Gold, flow between countries, 45, 
96. 

Glassware for laboratory use, 208. 

Gloves, cotton, duty of 1909, 168. 



/ 



218 



Index 



Hawaii, effects of reciprocity with, 

122. 
House rents in U. S., 75. 
Howard, ( Harvard ) Independent, 

35, 41. 

Immigrants and cheap labor, 9, 
68, 92, 93. 

India and Great Britain, wages 
and international competition, 
51. 

Ingersoll, R. G., 42. 

International payments, mechan- 
ism of, 96. 

Iron and steel, exports from U. S., 
51. 

Japan and Great Britain, wages 
and international competition, 
51. 

Jokers, 178, 185. 

Key industries, 201, 207. 
Knives, table and pocket, 65. 

Lincoln on the tariff, Ch. 2 passim. 
London as international clearing 
house, 96, 99. 

Malthus, 15. 

Marshall, 150, 157. 

Matteson, 35 n., 41. 

McCleary, 38. 

Mechanics' wages, 67. 

Mercantilist view, 3, 96. 

Military commodities and the tar- 
iff, 196. 

Military prowess, industrial influ- 
ence of, 24, 95. 

Mill, J. S., 1, 83. 

Money, flow of between countries, 
45, 96. 

Monopoly and dumping, 12, 108. 

Monopoly and protection, 143. 

Nationalist feeling, strengthens 
protection, 29. 



Noncompeting groups, 89. 
.Nippers and pliers, duty of 1909. 

170. 
Noyes, 88 n. 

Potash, 203. 

Protection, reaction toward after 
1879, 2. 

Razors, duty of 1909, 172. 
Railroads, low rates in U. S., 62, 

78; rates for export discussed, 

105, 107. 
Reciprocity, Ch. 6 passim; special 

form under tariff act of 1890, 

120. 
Retail prices in U. S. and Europe, 

79. 
Ricardo, 1, 28, 84 n. 

" Scientific " solution of tariff 

problems, 180. 
Senior, 84 n. 
Sewing machines, usually exported 

from U. S., a few imported, 65. 
Shaw, L. M., 37. 

Smith, Adam, 5, 23, 28, 148, 211. 
Social ladder in Great Britain, 23. 
South America, reciprocity with, 

130; balance of trade with U. 

S., 99. 
Standard Oil, export prices, 108. 
Stanton, 38, 40. 
Steel corporation, export sales, 

13 n., 166, 167. 
Steel, structural, duty of 1909, 

164. 
Surgical instruments, 209. 
Surplus and foreign market, 5. 

Taft, 197. 

Tariff board of 1910, 149, 182. 
Tariff commission of 1882, 187. 
Tariff commission of 1916, 149, 

180, 214; proposal for discussed, 

Ch. 10. 



Index 



219 



Wages and the tariff, Ch. 3, 
passim; 6, 139. 

Wages, why high in U. S., 55; 
why high in terms of money, 
71, 81. 

Wells, D. A., 18. 

Wool, cost of, 150; in territories, 
152; in Ohio, 153; should be 
free of duty, 155; how assess 
duty if any, 156. 

Woolen goods, compensating du- 
ties on, 159; cost of production 



in U. S. high, 160; machinery 

imported, 169. 
Wheat in relation to wages and 

prices, 72. 
White, Horace, 40 n. 

Young industries, protection to, 
16. 

Venezuela coffee, 122, 126. 

Zollverein, 20. 



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